This was a major issue throughout the 1980’s and 1990’s, when it frequently came close to passage. The amendment responded to concerns that federal spending was spiraling out of control, and it would have imposed debt limits on the government. They definitely were needed and the current public debt is $11.7 trillion, or about $37,900 per person. It is increasing at the rate of about $3.92 billion dollars per day.
The Balanced Budget Amendment was clearly in the spotlight with the election of a Republican Congress in 1994. This was the first time in 30 years the GOP was in power in both Houses and item number one in their 1994 Contract With America was the Fiscal Responsibility Act.
It called for an amendment to the Constitution which would require a balanced budget, unless sanctioned by a three-fifths vote in both houses of Congress. This was passed by the House of Representatives as Joint Resolution 1 on January 26, 1995 by a vote of 300 to 132. It then became Senate Joint Resolution 1 and was co-sponsored by all of the Republican lawmakers, except one.
They were joined by 7 Democrats (Bryan (NV), Kohl (WI), Graham (FL), Baucus (MT), Breaux (LA), Moseley-Braun (IL) and Robb of Virginia). A Constitutional Amendment requires a two thirds vote for passage. On March 2, 1995, the Senate failed to adopt it by a vote of 66-to-35. This was one vote shy of the necessary two-thirds. Six Democratic Senators who voted for the resolution in 1994 voted against it in 1995. All of them had been lobbied by President Clinton.
The group included Majority Leader Tom Daschle (SD), Wendell Ford (KY), the Senate Whip, Harry Reid (NV), the present Majority Leader, and Byron Dorgan (ND). Senator Mark Hatfield (R-OR) was the only Republican who broke with his colleagues by failing to support the amendment, and he refused to abstain. Hatfield said it was the most important vote in thirty years on Capitol Hill, but he saw it as “a political ploy to erroneously make Americans think we are actually doing something about the deficit.” An unsuccessful effort was later made to strip Hatfield of his Chairmanship of the Appropriations Committee in retaliation.
Had the amendment passed, the federal government’s power to use deficit spending would have ended. The Amendment was brought up again in June of 1996 when it failed by two votes. The Democratic Party platform opposed the Constitutional Amendment. In addition, Senator Bill Nighthorse Campbell cited the Balanced Budget Amendment as the reason he switched from the Democratic to the Republican Party.
My August 25th article outlined the six critical factors which led to a balanced federal budget in the late 1990’s. This happened on President Clinton’s watch so of course he is entitled to some of the credit, but he is also the person who diligently fought practically all spending reductions, as well as many of the policies that are now an integral part of his legacy. If his 1992 “Putting People First” agenda had been adopted the Clinton Administration would have left office with a large deficit.
It is important to reexamine the original Clinton agenda because it is so similar to President Obama’s current proposals. The major difference is that our outlook is far worse today. Our national debt is $11.7 trillion dollars and our GDP is approximately $14 trillion. Our debt to GDP ratio will be 85% by the end of this year and over 90% next year.
Liberal columnist John B. Judis of “The New Republic” best described the comparison between the Clinton and Obama agenda’s:
“I would draw a distinction between the Clinton of 1992-1994 and the Clinton of 1995-2000. There is enormous political continuity between the Clinton of “Putting People First” (his 1992 campaign manifesto drafted by Robert Reich and Derek Shearer) and today’s Obama administration.
“When Clinton was elected, the economy was in recession, and Clinton’s initial proposals (including a stimulus program, industrial policy, and national health insurance) anticipated what Obama has proposed during his first year. Like Obama, Clinton imagined himself as Franklin Roosevelt’s successor–even paying a conspicuous visit during his first hundred days to Hyde Park. . . after getting repudiated at the polls in November 1994, Clinton had to pursue a much more cautious policy for the rest of his six years. Clinton’s last six years were dominated by incremental reform and “new economy” boosterism. . . Obama is the president Clinton aspired to be in 1993.”
Based on Clinton’s original budget which he submitted in 1993, the deficits from 1995 to 1999 turned out to $902 billion less than the administration’s projections. That is what the deficit would have been if Clinton’s priorities had been approved by Congress and stayed in place. A major part of the reason why we achieved a balanced budget is that Republicans in Congress rejected many of Clinton’s spending proposals.
Because of Clinton’s veto, Republicans were not successful in cutting existing programs during the first two years, but after the 1994 election most of the expensive elements in the President’s domestic agenda were no longer feasible. The expansion of the 1990’s was not because of the administration’s economic agenda, but in spite of it. Some major elements of the Clinton agenda were as follows:
1) In 1993, President Clinton’s $19.5 billion stimulus program was stopped by a Republican filibuster which held despite four Democratic attempts to break it. Not one of the 43 Senate Republicans voted to cut off debate. The GOP emphasized that the stimulus added to the deficit instead of having its spending matched by cuts elsewhere in the budget. This was Clinton’s first serious legislative defeat.
2) The Congress denied the administration the sweeping nationalization of health care they sought during the first two years in office. The total new tax burden that was to be imposed under the Clinton Health Plan was a staggering $1.511 trillion over the first five years, according to the Congressional Budget Office. This included $1.384 trillion to pay for Clinton’s mandatory health alliances, would have entailed a new payroll tax of between 14% and 17% on every working American. In addition, the Clinton Plan would have imposed 17 other new taxes that would have cost $127 billion over 5 years, and $300 billion over ten years. Thus, the average American family would have faced a massive new tax bill of $3,056 per year to pay for Bill Clinton’s plan. The Administration also admitted that health insurance premiums would rise.
3) The budget Clinton submitted in January 1995 called for $12 trillion of new spending over the next seven years and this would result in annual $200-billion deficits. David Broder of the “Washington Post” described this budget buster as a “symbol of Clinton’s failed leadership.”
4) Similar to other Presidents, Clinton was unable to rein in entitlement spending. Social Security, Medicare and Medicaid were not reformed. In his first address to Congress in 1993 Clinton vowed to reform Social Security. He made the same pledge in his last State of the Union Address. President Clinton also promised to slow the growth of Medicare and Medicaid, but nothing happened.
If the Clinton Health Plan had been enacted it would have created new federal entitlements that would have exploded the deficit. By 1998, just the second year in which Clinton’s plan was to be in effect, the total cost of these government subsidies would have been larger than any federal program except Social Security and Medicare. This plan alone would have stopped the balanced budget.
President Bill Clinton began 1994 by promising to produce a balanced federal budget in a decade. The GOP captured Congress that November with a pledge to balance it in just 7 years. It was the most popular part and the first item in their Contract With America. Clinton opposed the GOP 7 year plan plan and said it was far better to do this in ten years because of “the pain we would inflict on our elderly, our students, and our economy just isn’t worth it.”
The President did not know it then, but America would have balanced budget in just four years. President Clinton began 1995 but advocating numerous new spending programs, but he does deserve credit for abruptly changing course that Spring. The changing is best signified by the most memorable line from his 1996 State of the Union Address: “The era of big government is over.” He would also apologize for raising taxes too much but solid economic growth was setting in by the time of his 1996 re-election campaign. It had nothing to do with Clinton but Americans gave him much of the credit. Clinton’s approval rating increased significantly and so did the job market. Unlike 1993 and 1994, Clinton stayed in the middle and won re-election handily.
Despite his conciliatory rhetoric, Clinton aggressively fought Republicans on budget issues from 1995 through 1997. He never would have agreed to drop many of his spending programs without the GOP Congress. There was a ferocious budget battle and the federal government was shut down for 24 days during the 1995 budget negotiations when President Clinton refused to agree to spending reductions in the GOP budget. He submitted five different budgets in 1995 but none of them was balanced.
Joe Klein described this time in his book, “The Natural:”
“In the summer of 1996, Clinton’s grand first-term dreams had shriveled into a set of proposals. He would spend all of 1997 working on a balanced-budget agreement with the Republicans. The 1997 Balanced Budget Agreement–the first nominally balanced budget in 30 years–received insufficient attention. . . . The 1997 BBA was an achievement ignored by Clinton’s critics on the left (who wanted bigger social programs), on the right (who wanted less spending), in the press (who mostly didn’t notice), and in academia. “These aren’t big pieces of legislation. These are scraps off the table,” said one critic.”
In 1997, the Republican Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton. It lowered the top capital gains tax rate from 28 percent to 20 percent; created a new $500 child tax credit, and increased the estate tax exemption from $600,000 to $1 million. The result was almost immediate. Capital gains tax payments skyrocketed at the lower rate. This was helped by the use of stock options that were exercised during the internet boom. The result was nearly $90 billion in extra income in the late 1990’s.
This allowed Clinton to propose a balanced budget for 1999 in his 1998 State of the Union message. The proposal came three years ahead of the forecast from1997’s balanced budget pact with the Congress. The compromise that was achieved laid the foundation for the economic boom of 1997, 1998, 1999 and the first half of 2000.
The tax cuts and the capital gains tax reduction caused a burst of tax revenue and this also helped to swell the stock market expansion. Prosperity led to an unprecedented 60% increase in tax income in the final Clinton years. By cutting the rate of taxation, the revenues collected from capital gains were increased by nearly $90 billion, and this outpaced the expectations of even the most optimistic forecasters. This proved that tax rate cuts do work to stimulate economic growth and tax revenue growth as well. There was also an explosion in venture capital activity in the late 1990’s.
In 1995, before the tax cut, just over $8 billion of venture capital was invested into the economy. By 1998, the first full year in which the capital gains tax cuts were in effect, venture capital pumped almost $28 billion into the economy. From 1997 to 2000 the economy grew 4.2% and it was bolstered by technological advances which led to the Internet-based “New Economy.” The so-called Tech or Dot com Bubble lasted from 1998 to 2001.
The downside to all of this is that the crash of the dot-com bubble wiped out $5 trillion in market value of technology companies from March 2000 to October 2002. The dot-com bubble burst on March 10, 2000, when the technology heavy NASDAQ composite index peaked at 5,048.62, more than double its value just a year before.
“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.
Earlier this week the Obama Administration rolled out a new economic forecast that added $2 trillion to deficit projections from 2010 to 2019. The new total is over $9 trillion and many experts believe the President will have to eventually raise taxes on the middle class. The administration is already intent on a significant tax boost for the wealthy, so it useful to review the past results.
The most memorable soundbite from his 1988 acceptance speech at the Republican National Convention was when George H.W. Bush said: “And I’m the one who will not raise taxes. My opponent now says he’ll raise them as a last resort, or a third resort. But when a politician talks like that, you know that’s one resort he’ll be checking into. My opponent, my opponent won’t rule out raising taxes. But I will. And the Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes.’”
He regretted the strong language four years later when the phrase was endlessly repeated by opponents Bill Clinton, Ross Perot and Pat Buchanan. A tax increase, which included a new top bracket of 31%, was necessary for Bush to obtain the 1990 Budget Agreement. Among those telling Bush to go along with the tax increase were OMB Director Richard Darman, White House Chief of Staff John H. Sununu, Gerald Ford, Paul O’Neill, and Lamar Alexander. The headline of the New York Post the next day read “Read my Lips: I Lied.” Bush was raising taxes rates on the upper brackets mostly by ending their deductions and exemptions. It didn’t work: Individual income taxes brought in 8.3 percent of GDP in 1989 and just 7.6 percent of GDP by 1992.
Even though Bush was breaking his word and this would end his political career, Bush went along with the compromise because the agreement contained deficit reductions and PAYGO. PAYGO required all future spending increases to be offset by decreases. It was thought that this would control all future increases and eventually the deficit would be wiped out.
PAYGO was in effect from 1991 to 2002, and while it sounded great, the Congress had fooled Bush because numerous loopholes were discovered to avoid its restrictions. Discretionary spending was totally exempted from PAYCO. That includes programs such as defense, education, environmental protection or 38 percent of federal spending. Noram increases in entitlement spending are also not covered. Anytime PAYCO presented a problem for Congressional spenders they just waived it. “PAYGO is like quitting drinking, but making an exception for beer and hard liquor,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Former President Bush now says the tax increase was one of his greatest regrets. He did not realize the PAYGO pledge was highly exaggerated and “I should have held out for a better deal.”
In fairness to Bush, PAYGO and statutory budget controls were useful in restraining entitlement increases. The situation would have been worse without them, but PAYGO was not the panacea portrayed by its advocates in 1990.
President Bill Clinton also broke his promise to pass a middle class tax cut but it had little impact on his popularity. The 1990 Budget Agreement did not reduce the deficit significantly and it remained a major issue in 1992. Independent candidate Ross Perot campaigned as a fiscal conservative. He had never held elective office and when his lack of experience was criticized in the presidential debates he responded “I have no experience in creating a $4 trillion debt.” Public opinion polls showed Perot with over 40% of the vote in June of 1992, and if the election had been held at that point Perot would have received a landslide 408 electoral votes. Republicans concentrated all of their fire on Perot in the Spring of 1992 and Bill Clinton was able to use this time to reduce his substantial negative ratings.
Similar to George H.W. Bush, Clinton’s solution to the deficit was a tax the rich plan. This was an essential part of his 1993 tax hike, which is similar to President Obama’s current proposal to raise revenue by increasing taxes on the top 5% of income earners.
No Republican voted for Clinton’s 1993 tax hike which passed the House of Representatives by one vote. It also took Vice President Al Gore’s tie-breaking vote to secure final passage in the Senate. Dozens of Democrats went down to defeat a year later for supporting the tax hike.
According to Dr. Alan Reynolds of the Cato Institute, “Clinton piled on another layer of high tax rates, 36 percent and 39.6 percent, while also greatly hiking taxes on Social Security benefits of working seniors. That failed, too: Individual income taxes brought in only 7.8 percent of GDP in 1993 and ’94, 8.1 percent in 1995. Federal revenues did not get much above the 1989 level until 1997 – when they rose because the capital-gains tax was cut.”
Similar to Bush, Clinton himself later admitted that taxes were increased too much. In fairness to Clinton, his tax hike took place when America was viewed as a low tax nation. Foreign companies were then coming to the United States because our taxes were lower than what they had to compete with at home.
This situation is far different today because so many other nations have now lowered taxes to foster economic growth. There has been no employment growth in places such as Silicon Valley in the last decade because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. This is another reason why President Obama’s tax proposals are unlikely to generate significant revenue.