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Bentsen Op-Ed on the Deficit

Where Does the Deficit Come From?

Lloyd Bentsen

An Op-Ed that I drafted the bulk of for Lloyd Bentsen, and of which I am quite proud. It ran in the Wall Street Journal on November 3, 1994.

Last week Alice Rivlin and I released our two agencies' final report on the deficit in what is called the 1994 "fiscal year"--the accounting period that ran from October 1, 1993, to September 30, 1994. The federal deficit was $203 billion. Fiscal 1994 was also the federal government accounting period covered by President Clinton's first budget: the economic growth and deficit reduction budget proposed in February 1993, and enacted in two cliff-hanging one-vote victories at the beginning of August 1993.

When President Clinton took office, we projected that--if the Administration did nothing--the deficit would be $302 billion in fiscal 1994. It is extremely good news that the President's leadership in cutting spending, the positive response of the economy to the President's plan that boosted revenues, and some good luck on "technical" matters that affect spending together gave us a fiscal 1994 budget deficit nearly $100 billion lower than we had feared at the start of 1993. And it is extremely good news that, because of the President's deficit-reduction program, we are now projecting that the current fiscal year, fiscal 1994, will see a deficit of $167 billion or so, or 2.4 percent of America's total national income.

But $167 billion a year is still a substantial deficit. It may be smaller, relative to the size of the economy, than any of the deficits during the administrations of Presidents Bush and Reagan. But, relative to the size of the economy, it is larger than all save one of the deficits during the administrations of Presidents Kennedy, Johnson, and Nixon.

Yet the past five years have seen two substantial deficit-reduction programs enacted, in 1990 under President Bush--who demonstrated real courage then in putting the long-run health of the American economy above his own political career--and under President Clinton's leadership in 1993.

Why then does the federal government still have a substantial deficit?

Some claim that the continued existence of the deficit proves that the government's appetite is always out-of-control: something in Washington-maybe in the water-forces Congresses and Presidents to always push spending well beyond reasonable limits. But when I take a look at where the deficit comes from, I see that such claims are not true. Our current federal deficits have a single source: they are the hangover from the borrow-and-spend bender that the government tied on in the 1980s.

If we had balanced the budget since 1981, we would now have no deficit.

For example, let's look at our projections for the current fiscal year, fiscal 1995. We now project that during fiscal 1995 the federal government will collect $1,354 billion, or 19.0 percent of national income, in taxes. It will spend $1,297 billion on all programs combined, or 18.1 percent of national income. The federal government will take in $57 billion more than it spends on all programs combined, from Social Security and Medicare to the FBI, from unemployment insurance to the Air Force.

Why then a deficit? Why do we not project a $57 billion surplus? Because substantive programs are not the only source of checks written on the Treasury. In addition, I have to pay interest on the outstanding national debt. As of the end of President Carter's last budget, fiscal 1981, the total national debt amounted to $785 billion.

This debt is still outstanding--every time we have paid off one of the bond issues that were outstanding at the end of fiscal 1981, we have raised the money to pay off the bondholders by borrowing again. In fiscal 1995, we are going to spend $51 billion in interest on that portion of the national debt that pre-dates the budgets of the 1980s. But if the pre-1981 debt were our only national debt, as would be the case if we had balanced our budgets throughout the 1980s, we would still be running a surplus: the $57 billion excess of revenues over spending on programs would provide enough to pay the interest on the pre-1981 debt, and leave a surplus of $6 billion or so besides.

In addition to the $785 billion of debt that existed at the end of fiscal 1981, there is an extra $2,665 billion of debt that has been borrowed since. The interest we owe on this, post-1980 portion of the debt, amounts to $174 billion in fiscal 1995. Interest on the post-1981 debt alone is more than our entire projected deficit this fiscal year.

This is why I say that our current deficits are not the result of an inherent and omnipresent out-of-control government appetite. Instead, they are the result of the borrow-and-spend policies that have run up $2,665 billion of national debt since the end of fiscal 1981.

In the 1980s we went on a national bender, cutting taxes and raising defense spending, without making provision for the long-term fiscal soundness of the government. Now we have a national hangover, a $2,665 billion worth of debt hangover that gives us an extra $174 billion of interest payments, and our current $167 billion deficit headache.

It was a heck of a bender, it is a heck of a hangover, and--for a Treasury Secretary at least--it is a heck of a deficit headache.

We are no longer on our bender--revenues are more than enough to cover program spending. But we still have the hangover, and the headache. How should we deal with this headache that is the remaining deficit?

Some politicians seem to want to propose hair-of-the-dog: another round of unfunded tax cuts and defense spending increases, on the principle that if it felt good in the early 1980s maybe it will feel good enough in the late 1990s to make us forget our hangover. But I can't recommend hair-of-the-dog. If we tried it I would feel very sorry for whoever is Treasury Secretary a decade from now, who will have five times the debt-and-deficit headache that I do.

I recommend that we take some aspirin and go about our business. Indeed, that's what President Clinton asked us to do in his 1993 deficit-reduction plan. We do feel much better: as a share of our national resources, the 2.4 percent of GDP deficit of 1995 is half the size as a share of national product as the 4.9 percent of GDP deficit of 1992.

And as we go about our business, let's never forget that the source of our headache today is not anything we are doing today, in terms of federal revenues and program spending, but that we really tied one on last decade.

Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax