Do We Really Need to Balance the Budget?

July 1 - July 15, 1996

Created by Washington editor James Fallows

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EXECUTIVE-DECISION MEMORANDUM

To: The President of the United States
From: D. N. Forser, Chief of Staff
Re: Do We Really Need to Balance the Budget?
Date: July 1, 1996

Isn't it peculiar to think back to the old days, when people had to address each other as either "Mr." or "Ms." something-or-other, and also had to consider such possible variations as "Miss," and "Ms." or even "Master" or "Ma'am"? Think of the potential for error! Imagine the uncertainty that accompanied gender-neutral names such as "Pat" and "Chris." Things certainly have been easier for letter-writers, memo-writers, and average citizens of our nation since passage of the 35th Amendment to the Constitution, which of course mandated that "Mr./Ms." replace all those previous terms. I feel that this amendment will prove just as popular and lasting as have the 33rd and 34th Amendments. The 33rd (Let's Even the Odds) Amendment, which made it a federal crime for citizens to leave their homes without carrying a concealed automatic weapon, has survived recent court challenges. And the Secretary of State assures us that there is surprisingly little international complaint about the 34th (Gasoline Tax? Never!) Amendment. Purists might gripe about the "fairness" of this amendment, under which the U.S. asserted its control over all petroleum, natural gas, and coal reserves on the North American continent, whether or not they were technically within the "borders" of Mexico or Canada. But this is the international age, borders don't mean what they used to, and our people need fuel for their cars! So those two amendments, plus the 35th (Call Me Mr./Ms.) Amendment, all seem secure.

But I digress. The reason for my digression is that I have an unpleasant task before me. I need to speak to you about -- groan -- the DEFICIT.

I have had our research staff looking into the exact point at which this subject became the center of all domestic politics for your predecessors. Some of their work suggests that the turning point arrived in the late 1970s. The well-intentioned but hapless President of that era, James Earl Carter -- a man now remembered mainly for the excellence of his speeches -- apparently had a rude introduction to the deficit in his first year in office. He came into the Presidency all excited, with the big ideas each new arrival has. He was going to rebuild America's energy supplies (why didn't he think of the 34th Amendment?), he was going to invest in education, he was going to improve hospitals, and he wasn't going to raise taxes. He sent a budget up to Congress to do all these things, and it projected an annual federal deficit of some $40 billion. You would have thought that Carter was a communist, or that he was as weak and unpopular at the beginning of his term as he became at the end! The all-powerful bond markets panicked; Congress sent back the budget; and from then on Carter labored with a big stone labelled "Deficit!" strapped around his neck.

Ronald Reagan didn't worry about deficits (or much else!) but the party that was held during his tenure just meant that all his successors, including you, have had to slink around with that stone around their necks. The deficit stone pulled poor George Bush right off the bridge of the Ship of State and into the briny deep of the defeated one-termers. He made his famous "Read My Lips" promise to win office in 1988, then out of fear of increasing the deficit he broke the promise, and his own party never forgave him. Bill Clinton inherited the deficit stone and was pulled so far over by it that he spent his first two years in office doing many of the things that he had criticized the Republicans for. He raised taxes, he gave up much of his vaunted "investment" program, he let the Federal Reserve Board put on the financial screws, and in general he acted as if the real job he'd be elected to do was to cut back the evil federal government. And that was just the first two years! During the second two years, with the Republicans in control of Congress, he was forced into bidding wars to see who could offer the more convincing promises about balancing the budget in the long run.

The irony is that, with all this huffing and puffing about fixing the "deficit problem" in the first half of the 1990s, the problem itself remained remarkably unfixed. It is true, as Clinton pointed out repeatedly in his reelection campaign, that he was the first President in half a century to reduce the size of the federal deficit for four years in a row. On the other hand, that comparison points out the magnitude of the remaining problem. The last President to achieve this feat, Harry Truman, did so at the end of an all-out war. After he had shrunk the deficit for four years in a row, there was not much deficit left. The Clinton-era deficit shrank all the way "down" to about $200 billion per year -- five times greater than the sum that seemed appallingly high in Jimmy Carter's time -- and the nature of the cuts practically guaranteed that the deficit would start rising soon after Clinton left office. During these four years of "falling" deficits, the total public debt increased by about a trillion dollars -- which is about as much as it did in the 200 years of American history leading up (leading down?) to the Reagan Administration. Indeed, four years after Clinton took office, our political system seemed to have achieved a kind of oddball trifecta in screwing up budget policy. Neither party had come up with a plan that would really eliminate deficit spending. But en route to that goal they had increased taxes for most Americans -- especially the working class, with ever-rising Social Security- and Medicare-payroll taxes. And because of the horror of dealing with the big categories of spending -- our old friends Social Security and Medicare once more -- nearly everything else in the government was being hacked apart.

As I hope you know, Mr./Ms. P, I wake up daily with one goal in mind: to help you understand the weighty choices that you alone can make. Often I feel I can serve you best by presenting a wide variety of options. In this way I can reflect the nuances of the real world -- and I can also give your agile, capacious mind an opportunity to draw the distinctions that you love so well.

This deficit matter is a different case. In theory there could be thousands -- perhaps millions -- of separate options, reflecting all the different taxing-and-spending decisions that go into a budget and the range of different deficit totals we could be aiming for. But instead I'm going to present you with the hardest choice of all: a simple up-or-down, yes-or-no decision about the future of our budget policy. These are the questions on which the government awaits your guidance:

Is the budget deficit becoming so HIGH that it threatens our future stability and prosperity? In this case, an all-out push toward a real balanced budget should be the next priority of our administration. This is the "Learn from Ronald Reagan's Mistakes" scenario.

or:

Is the budget deficit becoming so LOW that it threatens to keep our prosperity level far below what it could be, and indeed even makes us vulnerable to sustained recession or depression? In this case you should stop pushing for a balanced budget and instead concentrate on HOW the government collects and spends its money. Please think of this as the "Learn from Herbert Hoover's Mistakes" scenario.

Let me be perfectly clear, Mr./Ms. President, about the decision I ask you NOT to make at this moment. In a recent Executive Decision, you wisely and calmly made your choices on entitlement policy. Your decisions on entitlements have an enormous effect on everything else about the budget, since the entitlements are the biggest part of the pie, and growing. Through most of the half-century after the Second World War, the federal government claimed about 20 percent of the gross domestic product. If there is no change in entitlement policy, by the year 2025 entitlement programs alone would represent nearly 30 percent of the GDP. Something has to be resolved on this front.

But not today. Today we ask you to decide about the size of the overall pie itself. (We'll cut up the slices accordingly, later on.) Should we continue pushing, with your supple and well-trained political muscles, for a reduction in the federal debt, aiming toward a balanced budget? Or should we declare victory on that front and pay more attention to the nature and direction of federal taxes and spending? It is up to you.

The selections are:

Please read a memo containing a brief argument in favor of Option A.

B: "Learn from Hoover's Mistakes" (Please read a memo containing a brief argument in favor of Option B.)

Option A: Learn From Reagan's Mistakes

Mr./Ms. President:

Four years after he took office, the usually sunny Bill Clinton was bitter about one point. (Well, one that didn't involve Whitewater, the press, or the related ebb and flow of daily politics.) Because of the tax increases he had sold to Congress, and the budget cuts he had swallowed, the federal budget would have had a surplus in his final year -- EXCEPT for interest payments on the debt run up during the twelve Reagan-Bush years.

President Clinton, that is, was learning a lesson about the magic of compound interest. Through the first two hundred years of America's fiscal history, federal debt had been an up-and-down thing. The government borrowed heavily for wars or public-works projects. Then it retired the debt. The government ran up so much debt during the Second World War that, by the end, the total debt outstanding was greater than the annual Gross Domestic Product. But over the next thirty-five years the economy always grew faster than the federal debt (yes, even under LBJ, with his guns-and-butter program), so the total federal debt steadily fell in relative terms.

It began rising in 1981, and even though it leveled off a decade later (at about two thirds the size of the annual GDP), every subsequent government has had to face two depressing facts. First, we have to pay and pay and pay forever for the cost of past deficits. Interest on past debt has been by far the fastest-growing component of the federal budget since the early 1980s. It is money that must be squeezed from working people's payrolls through taxes -- but that cannot be used to build schools, improve hospitals, train soldiers, or send payments to pensioners or the disabled. It is simple dead weight, and a central goal of our budget policy should be to avoid taking on any more of it.

The other depressing fact is that ALL projections show the federal deficit mushrooming again, starting around the year 2010 when members of the Baby Boom generation start to reach age 65. (Have I mentioned recently how fit and healthy you are looking? Hard to believe that you are one of the original boomers!) If we are to have any hope of avoiding a future fiscal catastrophe we need to start now and balance the budget while there is a chance. Every day we delay will make the process bloodier and harder. History will thank you for not losing your resolve. History tends to puff up the reputation of those who lead their nations against military threats. You can be the one who saved the union by saving its financial patrimony!

Please choose this option and allow your speechwriters to prepare the "Millions for Defense, But Not One Cent For Debt-Service!" speech, and your budget officers to draw up detailed choices for a true balanced budget.

Option B: Learn From Hoover's Mistakes

Mr./Ms. President:

Cutting down on calories is wise and healthy if you're five feet tall and weigh 250 pounds. It is dangerous and self-deluding if you're five feet tall and weigh ninety pounds. Big military spending made sense when there was a big Soviet threat to worry about. It doesn't make sense when the Soviet Union no longer exists.

You can choose the slogan you want to apply in this situation: "A foolish consistency is the hobgoblin of little minds"; "moderation in all things"; "let's just declare victory and quit." The reality, in any case, is that we've already solved most of the problems caused by extreme deficit spending -- and are on the verge of creating new problems through a doctrinaire insistence on pushing the deficit to zero. Fiscal anorexia can be just as dangerous as the physical kind.

The idea that the budget should always be balanced should have gone out of fashion half a century ago. The reason that John Maynard Keynes became famous, and that Herbert Hoover became a discredited one-term President, lies in Keynes's explanation of the circumstances in which unbalanced budgets are good. When the U.S. economy suddenly slowed in 1929, after the great Stock Exchange crash, Herbert Hoover was more concerned about a mounting federal deficit than anything else. He cut federal spending, which in turn threw more people out of work, and before you knew it FDR was on the steps of the Capitol, saying "the only thing we have to fear is fear itself."

In retrospect it all seems so elementary: What could Hoover have been thinking when he raised taxes and cut benefits for people who were losing their jobs? By Richard Nixon's time the consensus was expressed in the idea of the "full-employment balanced budget." Tax and spending rates should be set to balance the budget if everyone is working. But when people are unemployed, it is natural -- and healthy, according to this theory -- to have some deficit-spending, which provides stimulus that may put people back to work.

No one has challenged the elementary logic of this approach. But the moralism of balanced-budget proponents has taken us back to the mental universe of the Hoover days. Deficits were then seen as inherently sinful. The people pushing balanced-budget amendments see deficits as sinful now. That's crazy. Murder is a sin. Deficits are an aspect of public life that can be good or bad, depending on the circumstances.

Let's be realistic about this. The federal deficit was a serious problem when it was rising as a share of the national economy, as it did throughout the 1980s. Then it was a problem because it suggested a fundamental mismatch between what we wanted the government to do and what we were willing to pay for. In the long run, we do have another mismatch to deal with, but that begins and ends with the entitlement issue for Baby Boomers -- which you resolved in an earlier Executive Decision. (Do I remember correctly that you opted for the "Doctor Jack" solution to health-care costs? I'll re-check the files.) What we do not have is a runaway deficit problem right now.

In the 1990s, the crisis of ever-rising deficits ended. In the Clinton era, annual deficits fell modestly in absolute terms -- and quite substantially, as a share of the national economy. In the mid-1980s the U.S. had a larger deficit (as a share of its economy) than any of the other big-deal "G-7" industrial nations. In the mid-1990s it had the SMALLEST federal deficit, as a share of its economy, of any of these nations.

In other words, the "deficit nightmare" had become a theoretical bogeyman by the mid-1990s rather than a real threat to our national well-being. The real threats were different: the steady polarization of incomes; the decline of the public infrastructure; the ever-mounting total of consumer debt. I am sure you recall the historic pair of articles published in The Atlantic Monthly in the summer of 1996. In those articles, Thomas Palley explained why the debt-burdened, insecure private economy was more fragile than at any time since the 1930s, and Robert Levine demonstrated why a foolish quest for balanced budgets, regardless of the consequences, could make us all poorer in the long run.

They were right, of course. You can reflect the wisdom of their argument by dropping all talk about balanced budgets or relentless campaigns against the deficit. Instead you should use your talent for leadership, and your political capital, to explain to the public why a shrewd use of public spending -- mainly for investment and infrastructure -- and a revised approach to taxation (with reductions in the onerous payroll tax) is as wise a policy today as it was under FDR. We need no longer waste our time and breath inveighing against the deficit. That victory has been won.

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