The 1997 fiscal year--the accounting year of the federal government--ended yesterday. It will be the better part of a week before the Treasury Department releases its final report on what the U.S. federal government deficit was in fiscal 1997. But my friends and sources in the Treasury Department are guessing it will be on the order of $35 billion.
Such a deficit is a very small number: less than 0.4% of national product. It is the smallest deficit measured as a share of national product since 1970. For all intents and purposes the budget this past fiscal year was in balance--there are plausible corrections to the budget deficit that would put it in arithmetic surplus the year just past, and about as many such plausible corrections as there are plausible corrections that would boost the deficit.
The past summer also saw a great Washington-based political hoo-hah over the "1997 budget agreement," when President Clinton, Speaker Gingrich, Majority Leader Lott, and their staffs and supporters (with nearly all the members of congress as a supporting chorus) boasted that they had agreed on "historic" deficit reduction--and had provided America's middle-class taxpayers with children with valuable tax credits, and had provided those of us with unrealized capital gains (who have been waiting for capital gains tax rates to fall) with a tax break so that we can more cheaply rebalance our portfolios.
I'm here to talk about the 1997 budget agreement, and the fiscal 1997 deficit. And I want to talk about them in four ways, ascending from a narrow focus to a broad focus. I want to talk about:
- First, the magnitude of what was agreed on in the summer of 1997--trivial, and relatively unimportant.
- Second, the improvement in the deficit since 1993, which is not trivial--which is heartening, and important .
- It is important because, third, it brings into sight the likely end of the era of big deficits, an era that started in 1974 and was turned from a problem to a crisis with the Reagan tax cut of 1981--an era during which the deficit was doing considerable harm to the American economy.
- Fourth, however, don't get too cheery. My last point is that the long run fiscal crisis of the social insurance state remains unresolved.
Let me begin.
The 1997 budget deal
As such things go, the 1997 budget deal was not a mountain. It was, in fact, too small a hill for even a mole to take pride in. When it will be implemented, and it will not be largely implemented until 2001, it will shift around perhaps $20 billion in annual federal spending. In the context of an $8 trillion economy, that's only about 1/4 of one percent. By contrast the 1990 and 1993 deficit-reduction agreements were between six and eight times as large in the relative size of their effects on the economy.
Ivory Snow used to have a motto: 99 44/100 % pure. This deal is less important for the economy than the impurities were in Ivory Snow.
As you listen to the press describe the agreement, you can hear that it was not a very large deal by what they do not say. In previous deficit reduction agreements--1990 and 1993--supporters trumpeted the magnitude of progress that was being made in reducing the deficit. They boasted that in the President's next term half a trillion dollars of national debt would not be incurred because of the agreement. This time the bottom line was that this deal would balance the budget in 2002--of course, some estimates were saying then and more are saying now that the budget would be balanced in 2002 (if the economy performs up to expectations) even in the absence of the 1997 budget deal, even if the federal budget were put on automatic pilot.
So why the claims that the 1997 deal is "historic"? One answer is that our politicians do so because Cokie Roberts and company let them. The level of financial sophistication in the White House and Congressional press corps are appallingly low. The level of cynicism is appallingly high. You won't lose any credibility with the White House press corps if you claim that this is "historic": they assume you are lying anyway (which is often not true). And they will quote your words even if they do not believe you because your words make an interesting lead with which to open a story.
The root of the problem is that the White House press corps is not in the "inform the citizens" business or the "understand the issues" business. They are in the entertainment business. They never forget this. And by and large they find the meat and substance of public policy boring.
A second answer is that everyone involved wanted very badly to declare some kind of victory. President Clinton is always glad to reach an agreement, declare victory, and move on to other matters. Newt Gingrich had voted against both the 1990 and 1993 deficit reduction agreements--he had to vote for something if he was to get any credit at all for reducing the deficit. And having failed to get anything passed (save welfare reform) in 1995-1996, the Republicans as well appeared desperate to reach an agreement and declare victory.
Now we could--I do--snicker at our elected politicians, anxious as they are to trumpet a very minor relative shift in the government's tax and spending programs as a historic achievement--and believing that they could make such a claim stick. But we are the ones who tolerate the press corps in its current state. We--or at any rate I--teach the electorate for citizenship.
The real joke is on us.
The fall in the deficit in the 1990s
Let me move on to the second level. We should not let the fact that the historic 1997 budget deal was a non-event hide the fact that the country has made true, significant, serious progress at reducing the deficit since it reached its last high point in 1992.
The 1992 federal government budget deficit amounted to 4.7% of national product. Now it is less than 0.4% of GDP: ninety percent of the deficit is gone. Of the improvement, about half is due to policies: increases in taxes, and reductions in spending--or, rather, reductions in spending growth below the growth rate of the economy as a whole (it makes sense that as the economy grows, the amount of money the government needs for its programs should grow roughly as fast). And changing those policies took some guts. Representatives and senators had to tell some constituents that they would have to pay higher taxes, and had to tell others that they would not get their federally-funded goodies.
The other half of the improvement is due to better economic conditions. Today we have an unemployment rate of 4.8% or so. In 1992 we had an unemployment rate in the country as a whole of 7.6%, and this improvement in the economy has--for now at least--carried us to a place where our deficit is effectively zero.
Of the improvement in economic conditions, about half is due to luck, and about half is due to skill.
Let me pass over the "luck" part, and turn to the "skill" part. A lot of things could have gone wrong with the U.S. economy between 1992 and today:
- 1993 could have seen a deficit reduction package that was too small--investors could have lost confidence in the ability of the United States to ever bring its fiscal deficit under control, leading to renewed recession.
- 1993 could have seen a deficit reduction package that was too large--too large in the sense that its fiscal drag might have proven too much for the Federal Reserve to offset with monetary policy, leading to a risk of renewed recession.
- 1994 could have seen monetary policy turn too tight, leading to renewed recession.
- 1994 could have seen monetary policy turn too loose, leading to inflation acceleration in 1995 and 1996--and renewed recession by now.
Great skill (in addition to great luck) was shown in mapping out an economic strategy to successfully guide the economy over the terrain where ex ante it seemed there might be and ex post there was full employment, balanced growth, and low inflation. Great credit is due to the makers of fiscal and monetary policy: they were lucky, but they were also very skillful.
A few words about guts, on the part of Senators and Representatives.
When I was in Washington, a journalist once told me about a private conversation with John Breaux, Senator from Louisians. Breaux complained--I paraphrase--that under "Clinton it was no fun being a senator anymore." Under Reagan senators got to vote for tax cuts. They got to vote for spending increases. They got to vote for putting citizens of Louisiana to work pumping oil into salt domes. But under Clinton it was always raise, raise, raise taxes; cut, cut, cut spending. Why, Breaux asked, couldn't Clinton make life happier? More like what it was like under Reagan? Why did things have to be so hard?
It took a lot of guts--guts that John Breaux and companyhad--to vote for the 1990 and 1993 deficit-reduction agreements. Clinton gets credit for a booming economy, a low unemployment rate, an investment-led recovery, and more rapid productivity growth. The Gingriches, Doles, Armeys, and Lotts who voted against the 1993 deficit-reduction bill get boos and hisses. People--like John Kerrey from Nebraska--who said that they wanted to vote against it because it was a bad bill but "wouldn't ruin [Clinton's] presidency [so early]" get boos and catcalls as well. This is as it should be.
But George Buch and his team--the Sununus, and the Boskins, and the others--don't get much credit in the press or in politics. And they deserve credit. As best as I can esimate, the 1990 deficit reduction agreement did twice as much of the heavy lifting as the 1993 deficit reduction agreement.
The end of the era of deficits
They deserve it because the fact that the 1997 deficit was near zero tells us taht we have reached what we hope is the end of the era of big deficits.
In this conext the 1997 agreement is a step--not an especially large step, but a step, a step that takes us past a milestone, and hopefully the final step--in a long journey. Back in 1981 the Reagan administration made a huge mistake in its budgetary policy, a mistake which gave us fifteen years of unprecedented peacetime budget deficits.
It is hard now to understand how this mistake coul dhave been made. Even those who made it--the David Stockmans, James Bakers, Martin Andersons, Richard Darmans and others--don't understand it. They have been waging fratricidal war for seventeen years, each saying that someone else was it fault. And yet they have not even managed to reach a consensus as to what, exactly, the "fault" was.
The deficits of the 1990s have left us poorer as a nation than we would otherwise be. How much poorer? I can generate without working up a sweat estimates between $1000 and $3,400 in lost annual income for each American worker. That's a loss in national productivity of some some $250 billion a year--about $4,000 a year of lost annual income for each family of four. And we can and should lay at the door of those who made up the government budget back in 1981. Now we have finally fixed this mistake: we haven't yet made up the economic ground we lost, but at least we are no longer losing additional ground.
That's cause for great celebration.
Scenarios: Costs of the Reagan Deficits
The fiscal crisis of the social insurance state
But let me make a fourth, final, point.
We have a budget in rough balance for the next decade. But look out further into the future. We--still--have a social insurance system, a Medicare and Social Security system, designed for an economy growing at an average rate of 2.5 percent per person per year. But we have an economy that grows more slowly, at an average speed of only 1.5 percent per person per year. So the taxes earmarked to pay for Social Security and Medicare won't cover the costs.
At some point before the baby boom generation retires we as a country are going to have to decide whether to cut Social Security and Medicare benefits, or raise taxes. The sooner we make that choice, the easier the adjustment is going to be. And we just passed up another chance to make that choice.
And a second, depressing , long run thought: this past generation has seen America become a much more unequal country--the slots in the labor market occupied by the relatively rich pay much more than they did a generation ago, while the jobs that today's working class and lower middle class occupy pay little more than the jobs that the working and lower middle class of a generation ago had.
Given that democracies and republics survive only when the voters share what Alexis de Tocqueville called a fundamental equality of conditions, a time--like the past generation--when income inequality widens is a time when the tax system ought to become more progressive, to cushion the market-driven increase in inequality by redistributing more from the rich to the poor. Yet over the past generation the tax system has become less progressive.
And the tax changes in the 1997 agreement continue this trend of taking a bit from the working class and the lower middle, and giving it to the upper middle class and to the rich.
|Professor of Economics J. Bradford DeLong, 601 Evans, #3880|
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax