February 14, 1997
"America Needs to Start Figuring Out How It Will Pay for the Retirement of the Postwar Generation: The Difference that a Deficit Makes"
San Jose Mercury News
By Timothy Taylor
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IT'S PURE Bill Clinton. In his State of the Union address last week, the president exhorted, ''Let this Congress be the Congress that finally balances the budget... Whatever our differences, we should balance the budget now...''

Two days later, he proposed a budget which would not balance during this Congress, nor during the Congresses which will be elected in 1998 or 2000. In fact, more than three-quarters of Clinton's proposed budget balancing is scheduled to happen after he has left office, in 2001 and 2002. Apparently, Clinton believes that a balanced budget is so important that his successor should make it a top priority.

But while these rhetorical games are annoying, and while a balanced budget has considerable political and symbolic importance, the cold economic truth is that it doesn't make much difference in the short term whether the nation moves aggressively toward a balanced budget by 2002.

After all, the primary economic justification for reducing the budget deficit is that when the federal government borrows money, then either less money is available for domestic companies to invest, or the U.S. becomes more dependent on foreign capital. Either consequence reduces the long-term rate of economic growth, but the impact cumulates slowly, in decades rather than years. Moreover, deficits are relatively low right now, so reducing them has less payoff. With help from George Bush's deficit-fighting package in 1990, Clinton's package in 1993, and steady economic growth for the last five years, the deficit had dropped from $290 billion in 1992 to $107 billion for 1996.

Barring a major recession, a war, or a catastrophe like the savings and loan bailout, the deficit appears likely to stay relatively low for the next 10 years or so, with only minor tinkering from Congress and the president.

From a long-term perspective, however, the picture is more severe. In 10 to 15 years, the baby boomers who were born after World War II will start retiring in force. The proportion of the population that consists of working-age taxpayers will decline; the proportion depending on government programs like Medicare and Social Security will rise. Because of these demographic trends, last summer's baseline estimates of the non-partisan Congressional Budget Office, which assume no significant changes in current policies, show a deficit that will rise sluggishly in the next decade, and then take off sometime around 2010.

When you're talking about going on a diet, or saving for your personal retirement, the key for long-term success is getting started now. The same is true for dealing with the budget deficit. The CBO finds that balancing the budget by 2002, and keeping it balanced after that time, would have a nearly imperceptible effect in the short term; by 2010, for example, the economy would be only about 3 percent larger. But the effects of reducing federal borrowing would accumulate, and by 2030, the economy would be 25 percent larger because of the balanced budget policy.

In an intriguing alternate projection, the CBO considered a budget policy which would aim only at assuring that the amount of federal debt doesn't grow any faster than the size of the economy. This policy would hold deficits to about 1.6 percent of gross domestic product - roughly the size of the 1996 deficit - but would not push for a balanced budget.

Such a policy does almost as well as the balanced budget approach, increasing the size of the economy in 2030 by 23 percent. This projection emphasizes that while holding down the deficit is good for long-term growth, there is no economic magic in whether the budget balances exactly.

There have been many promises to balance the budget in the last decade; remember the Gramm-Rudman act of 1986, which promised a zero deficit by 1991? This year, the real story is not whether Clinton and Congress make an unenforceable promise that whoever is elected in the year 2000 will balance the budget. Instead, the key issue concerning the deficit is whether we begin to address the long-term problem of how America will pay for the retirement of the baby boom generation.

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