June 12, 1996
"Peace Pays Off - The Federal Deficit is Down Thanks to Reduced Defense
San Jose Mercury News
By Timothy Taylor
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One of Bill Clinton's election-year boasts is that the budget deficit has
fallen for four straight years. The $140 billion deficit projected for 1997 would
be 1.8 percent of gross domestic product, the lowest percentage since 1979.
But the biggest single cause of the lower budget deficits isn't clever Clintonomics
- it's the crumbling of the Soviet Union.
Although you wouldn't always know it from the way some folks talk, America
has cut its defense spending substantially since Soviet power declined in the
late 1980s. In 1989, the defense budget was $304 billion. Next year, it's projected
to be $259 billion, which works out to a cut of 15 percent over eight years.
But that calculation greatly understates the real decline in defense spending.
If the 1989 level of defense spending had stayed frozen at the same real buying
power, but increased with inflation, it would have reached $385 billion by 1997.
From this perspective, the proposed 1997 defense budget is a real cut of one-third
from 1989 levels, worth about $125 billion dollars.
By an alternate measure, defense spending has fallen by an even larger proportion.
The Reagan-era defense build-up peaked at 6.5 percent of gross domestic product
in 1986. If defense spending had stayed at that level, it would be hitting $500
billion in 1997.
But in Clinton's proposed 1997 budget, defense spending will be 3.4 percent
of GDP. Thus, measuring defense spending as a proportion of the economy, it has
fallen by almost half in a little more than a decade.
So if the country has cut defense spending by a third or half, saving $125
billion or more each year, depending on the method of comparison, where did the
The peace dividend wasn't refunded as a tax cut. The tax take of the federal
government hovered about at 19 percent of GDP in the late 1980s, and is projected
to hit 19.4 percent of GDP in 1997.
However, the decline in defense spending has helped federal spending, measured
as a share of the economy, to shrink. Federal outlays were 23.5 percent of GDP
in 1986, but should drift down to 21.2 percent of GDP in 1997.
With taxes moving little, and lower overall spending, the budget deficit shrunk.
In 1997, the inflation-adjusted deficit will only be about half of what it was
in the mid-1980s.
Of course, one can slice and dice the budget numbers of the last decade in
lots of ways. Congress never specifically voted on what to do with the defense
However, a reasonable summary of the last decade of budget policy is that we
devoted the peace dividend to reducing the deficit. The rest of the budget scuffling
has been about how to trim back other areas of the budget to accommodate higher
spending on entitlement programs for the sick and aged.
Bill Clinton's budget policy deserves a mild amount of credit for not indulging
his more open-handed Democratic allies in a spending binge, and for restraining
his more open-handed Republican opponents from a tax cut, either of which would
have widened the deficit.
But without the disintegration of the Soviet Union, and the resulting bipartisan
agreement to cut defense spending over this last decade, it's difficult to imagine
that the president and Congress would have agreed upon an alternate way to cut
spending or raise taxes by $125 billion a year. The peace dividend has been the
main difference between a declining budget deficit projected at $140 billion next
year, and one that might otherwise be hovering near $300 billion.
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