Fair, Not Balanced

ON MARCH 3, 2004, Senator Hillary Clinton issued a dire and now familiar warning about the deficit: "If we look down the road, whether it is next year or two years from now, I think it is absolutely clear that we will see private capital crowded out of the capital markets because of the increasing need to feed the government debt. We will see interest rates rise...and we will be on a path to even further economic decline...."

On the next day, the 20-year Treasury bond rate was 4.89 percent. A year later, in March 2005, the 20-year Treasury averaged...4.89 percent. This was despite the fact that Federal Reserve Chairman Alan Green- span had meanwhile raised overnight interest rates six times. Today, the 20-year bond remains more than a full point lower than it was when Clinton's husband was president–and the budget was in surplus.

Shouldn't this be enough to raise a question? Are budget deficits really as evil as so many economists, journalists, and Democratic leaders presently claim? There was a day when Democrats did not think so. Franklin Roosevelt cured his urge to balance budgets during the early New Deal and spent his way out of the Depression and to victory during World War II. In June 1962, John F. Kennedy addressed the budget myths of that moment with balanced wisdom: "Debts public and private, are neither good nor bad, in and of themselves. Borrowing can lead to overextension and collapse -- but it can also lead to expansion and strength. There is no single, simple slogan in this field that we can trust."

But JFK's enlightened moment didn't last. Although Lyndon Johnson delivered a full employment surplus in 1969, he and the Democrats took the blame for earlier "Vietnam deficits" -- and they got blamed for inflation. Later, Jimmy Carter was tarred by stagflation, again blamed on deficits though, in fact, Carter was a tightwad, and the deficits were caused by the oil shocks and other events beyond his control.

In 1980, Carter withdrew his own budget, promising a new one that would be "balanced." Voters reacted by electing Ronald Reagan on a platform of large tax cuts. Soon deficits of more than $100 billion appeared. I remember well -- for I was executive director of Congress' Joint Economic Committee at the time -- how the remaining fiscal activists among top Democrats then converted, almost en bloc, to "fiscal discipline." What better way, they thought, to bash Reagan while appealing to conservative virtue?

It didn't work. Reagan's deficits were a success, delivering a stable recovery and his landslide in 1984. This time it was the Republicans who learned nothing. In 1992, the clueless George H.W. Bush tightened budgets in a recession, breaking his own promise not to raise taxes. Bush's virtue was greatly praised, but not by the voters.

The beneficiary, Bill Clinton, advanced an early strategy for strong growth, involving more deficits at first -- a spending program to end the recession -- but less later on. But Clinton soon buckled to the anti-deficit crowd, switching in 1993 to a program of higher taxes, which set the stage for the GOP's crushing midterm victory of 1994.

It's true Clinton then got lucky. The economy grew anyway, producing growth, jobs, stable prices, Clinton's reelection in 1996, and prosperity through the end of the decade. This was good for the country -- but a disaster for Democratic politics. It fostered the myth that Clinton had found a magic formula, good for all times, a final refutation of the pro-deficit views of John Maynard Keynes. By the millennium, high officials were saying foolish things, including that by staying on course the entire federal debt could be retired within 15 years.

But Clintonomics worked only because of circumstances that will not soon be repeated. After 1996, companies and households stopped saving -- indeed, they started spending well beyond their incomes. This gave the economy the stimulus that government had not provided. It then led to the technology boom, which attracted massive investments from around the world. This couldn't last, and it didn't. Though growth continued a few months past the NASDAQ's implosion, even past the 2000 election, it would have ended even if President Al Gore had taken office in January 2001.