Credit Where Credit Is Due

Nevertheless, in the 1980s, the nation was obsessed with the long succession of record deficits. Some economists complained that they would trigger higher interest rates and inflation. But interest rates and inflation dramatically fell. The effect of rising deficits and federal interest payments was less to crowd out private investment than to crowd out higher-than-otherwise expenditures on social welfare programs, on balance a good thing.

Indeed, considering the economic and political context of the time, the rising deficits of the 1980s were certainly worth it. Reagan’s supply-side tax cuts, which lowered the top income tax rate from 70 percent eventually to 28 percent, were vital to ending the mini-depression of 1978-’82 and launching the now 18-year-long expansion that has lifted the Dow Jones Industrial Average from 800 in 1982 to 11,000. Similarly, the $ 2 trillion defense buildup was instrumental in winning the Cold War. What we bought with $ 3 trillion of national debt was the end of the Evil Empire and the longest wave of prosperity in this century, a prosperity that has generated roughly $ 20 trillion in increased national wealth. Thanks in large part to the growth policies of the 1980s, today’s twenty- and thirtysomethings will be the wealthiest and safest generation of Americans in history.

It’s impossible to pinpoint exactly what caused the deficits to give way to surpluses in 1998. Liberals point triumphantly to Bill Clinton’s world-record tax increase in 1993 as the turning point, but they are wrong, as the numbers in Clinton’s own budget documents prove. Two years after the Clinton tax increase, the deficit was still stubbornly above $ 200 billion. What’s more, in early 1995, the White House budget office and the nonpartisan Congressional Budget Office each independently drew up a long-term budget forecast assuming Clinton’s policies. Both announced that progress in reducing federal red ink was stalled: They predicted $ 200 billion deficits until doomsday, unless fiscal policy were radically adjusted or economic conditions improved.

So what changed? In part, the election of a Republican Congress. The pivotal year in the deficit fight was not 1993, but 1995. That was the year when the Republicans, with their new majorities on Capitol Hill, engaged in nine months of hand-to-hand combat with President Clinton over the budget.

For all the vilification of Newt Gingrich, the man had a near-maniacal obsession with balancing the budget. Arguably, Gingrich’s finest hour as speaker of the House came in March 1995 when he rallied his entire Republican caucus behind the idea of eliminating the deficit within seven years. At the time, it seemed another hollow political promise.

Back then, I was advising the House leadership on the budget, and even I thought the tax cuts and balanced budget might never happen. With deficits so long a fact of life and the Democrats determined not to cooperate, the odds were stacked against the Republicans. For them to bite the bullet unilaterally and make the necessary spending cuts seemed tantamount to swallowing a live hand grenade. Nonetheless, House Budget Committee chairman John Kasich constructed a heroic seven-year balanced budget plan. Somehow he would ultimately muscle it through the House and Senate — with almost no support from Democrats.

But first, Bill Clinton set up a war room in the White House to shatter the GOP budget plan. When Republicans released their balanced budget roadmap, the White House waged a shameless Mediscare campaign — a campaign that even the Washington Post editorial page slammed as “pure demagoguery.” In the course of the budget battle royal, between April and December 1995, Bill Clinton had to submit not one, not two, but five budgets, until he finally submitted a balanced one. And that came nearly six months after the Republicans had submitted theirs. Clinton vetoed the first two GOP balanced budgets, bringing on the famous government shutdowns.

For Clinton now to take credit for the balanced budget is like King George III taking credit for the Declaration of Independence. The president insisted in his immodest speech to the Democratic National Convention last month that he wants to stick to “just the facts, ma’am.” And so he should, for the numbers don’t lie.

Here are the federal deficits forecast by the Congressional Budget Office in April 1995, assuming Clinton’s policies remained unchanged, and the deficits that actually transpired after the Republicans took control of Congress and junked Clintonomics:

 

FEDERAL DEFICIT

 

(in billions)

Over this period, the national debt grew more than $ 700 billion less than projected under Clinton’s policies.

But the House majority is not the only thing that changed. Some of the factors behind today’s balanced budget were set in motion long before Clinton became president or the Republicans seized Congress. One was the Cold War victory. Today the military budget is almost $ 150 billion lower in real terms than it was at the height of Reagan’s buildup in 1987. The peace dividend accounts for about one third of the deficit reduction over the past decade. It goes without saying that Bill Clinton was not a contributing factor to winning the Cold War.

By far the most powerful influence on the budget, however, has been the sizzling economy. In the 1980s, Reagan, Jack Kemp, Arthur Laffer, and other supply-side tax cutters were ridiculed — even by some Republicans, those of the old Rockefeller root-canal school — for believing in the “voodoo” theory that we could grow our way out of the deficit. But that’s precisely what happened. The cumulative windfall effect of 18 years of prosperity is that the economy has finally outraced federal spending. Tax receipts have been pouring into the federal treasury — growing an average of 10 percent annually for the past four years, with no end in sight.

Clinton-Gore enthusiasts counter this by saying: Aha, but it was the 1993 tax hike that caused the prosperity and the surging revenues. Again, the facts are otherwise. The economy grew 4 percent in the 12 months before Clinton and Gore were elected. After their tax increase was enacted, the economy actually slipped, growing 2 percent to 3 percent in 1993 and 1994. The major economic rationale for the Clinton tax increase was to lower interest rates. But between November 1992 and November 1994, interest rates didn’t fall. They rose by almost a full percentage point. Oops.

Yet despite Clinton’s obstructionism, he deserves some credit for the good things that have happened to the budget and the economy on his watch. It’s not a stretch to think that a lesser president could have screwed things up. Where Clinton was most effective, however, he was validating, not repudiating, the Reagan supply-side economic model, as when he promoted free trade, signed a capital gains tax cut (reluctantly), twice reappointed Alan Greenspan to the federal reserve board, and signed welfare reform (after vetoing it twice).

Clinton with a Democratic Congress was a recipe for disaster, but Clinton and a Republican Congress have produced a gravity-defying expansion. Since November 1994, the Dow has soared from 3,800 to 11,000 and the economy has grown at 4 percent without inflation.

Peace and prosperity balanced the budget. All that could cause these surpluses to vanish would be a new Washington spending spree.

Stephen Moore is president of the Club for Growth and an adjunct fellow at the Cato Institute.