A Decade Ago: Six Steps to The First Balanced Budget in 30 Years

“When I took the office the deficit for 1998 was projected to be $357 billion, and heading higher. This year our deficit is projected to be $10 billion, and heading lower. For three decades, six presidents have come before you to warn of the damage deficits pose to our nation. Tonight, I come before you to announce that the federal deficit–once so incomprehensibly large that it had eleven zeroes–will be, simply, zero. I will submit to Congress for 1999 the first balanced budget in 30 years. ” – President Bill Clinton, 1998 State of the Union Address

America’s economic outlook was significantly different a decade ago. There was a large trade deficit in 1999, but the other economic indicators were sound. Was this due to policies advocated by the Clinton Administration? Was it the Clinton Administration which achieved a balanced budget, a surplus, 22 million new jobs, as well as solid economic growth in the late 1990’s?
Supporters of the former President obviously think so, but an examination of that era reveals a different story. Many Republicans believe the economic success of the 1990’s happened despite the Clinton Administration, not because of it. They emphasize that President Clinton battled Republicans on taxes, the balanced budget amendment, deficit reduction and welfare reform.
All of these things initiatives were eventually forced on Clinton by a GOP Congress. Clinton does deserved credit for NAFTA, GATT and for not interfering with monetary policy. He also realized that a favorable business climate fostering economic growth trumped any government jobs program.
This is a good time to look back on the Clinton Administration. All of the major memoirs have been written. Historians are also able to place the Clinton Administration in perspective, and away from the political passions of that era. There were many factors which led to the booming economy and ultimately the balanced budget. This was achieved without making substantial cuts in the budget and we also did not receive a windfall of new cash from tax hikes.
Clinton was successful in passing a major tax hike in 1993, and its failure to raise revenue from the upper brackets is described in my August 22nd article. It took years of bitter debate, but in 19977 President Clinton signed the Balanced Budget Amendment, and in two years a balanced budget was obtained. The six major factors in achieving this milestone were as follows:
1) The election of a Republican Congress in 1994 which wiped out what was left of the Clinton economic agenda. This was the first time in 30 years the Republicans had control of both the House and Senate. The new Congress was able to stop 90% of Clinton’s spending initiatives, and they held down the overall rate of spending to below 2% annually. These actions were a powerful message for the stock market. The market increased by 2% during 1993 and 1994, but it soared over 20% from 1995 through 2000.
2) Passage of the capital gains tax reduction and the balanced budget amendment. The cap-gains tax dropped from 28 percent to 20 percent in 1997 – and revenues from that tax alone accounted for 12 percent of all individual income-tax payments from 1997 to 2000 – up from just 7.9 percent from 1993 to 1996. The result was nearly $90 billion in additional income.
3) The end of the Cold War which allowed for $150 billion in Pentagon reductions. This accounted for one-third of the deficit reduction. Military modernization programs were delayed throughout the 1990’s, and they proved to be necessary in the next decade.
4) The PAYGO or pay-as-you-go statutory budget controls were obtained for President George H.W. Bush in exchange for increasing taxes as part of the 1990 budget agreement. The budget situation would have been worse without them, but PAYGO was not the panacea portrayed by its advocates in 1990.
5) Welfare reform which resulted in $38 billion in savings. The number of families receiving AFDC payments declined from 14.3 million to 6 million. Nationally, cash-assistance rolls were cut by 60%, and former welfare recipients were required to work. . In 1992 Clinton had vowed to “change welfare as we know it,” and pollster Dick Morris told him that if he vetoed welfare reform a third time he would not be re-elected. Clinton caved and signed the bill one week before the 1996 Democratic Convention.
6) The golden age of venture capitalism. The dot com bubble burst and the economy was slipping into recession when Clinton left office, but the late 1990’s were years of solid of economic growth. Silicon Valley did transform the world, and the funding from venture capitalists was possible in part because the Reagan Administration had lowered the top tax rate from 70% to 35%, cut marginal rates and helped free up the money that started the Tech Boom.

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New Budget Raises Serious Concerns: Look For an 80% Jump in Electrical Rates

President Obama, accompanied by Budget Director Peter Orszag, right, and Treasury Secretary Tim Geithner, speaks about his fiscal 2010 federal budget, in the Eisenhower Executive Office Building.

President Obama, accompanied by Budget Director Peter Orszag, right, and Treasury Secretary Tim Geithner, speaks about his fiscal 2010 federal budget, in the Eisenhower Executive Office Building.


The new federal Budget submitted by the Obama Administration raises a number of significant concerns. Based on the funding priorities, the administration appears to be backing away from nuclear power (which generates 80% of France’s energy), school vouchers for poor children in Washington, DC, and earmark reform. The most significant concern is obviously the massive increase in federal spending.
The new Administration is not even two months old but we have already appropriated more money than the combined cost of what our military has spent in Iraq, Afghanistan and on Hurricane Katrina. This is the largest increase in discretionary spending since the Carter Administration. Despite all of the promises made during the 2008 campaign, the new omnibus spending bill has over 9000 earmarks.
The President focused on health care today, and is planning to pay for his new program with $646 billion which will be raised over a decade from pollution permits from industries that produce greenhouse gases. Many experts believe this could lead to an 80% jump in electrical rates and an EPA study says the result could be an additional $1.60 for every gallon of gas.
The primary architect of the new budget is Treasury Secretary Tim Geithner. A surprising Geithner critic is former Australian Prime Minister Paul Keating. Yesterday he spoke to the Lowy Institute in Sydney about Geithner’s record in handling the 1998 Asian crisis. Geithner fundamentally misdiagnosed the problem, and this led to the wrong prescription, Keating said.: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”
Geithner thought Asia’s problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts. The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.
Malcolm Turnbull in the “Australian” said “But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans – Thailand, South Korea and Indonesia – all had sound public finances. The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind. But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.”
Keating continued: “Soeharto’s government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power.”