The Myth of Deficit Reduction : It's The Spending Stupid

by Mark Anthony

The mythical "balanced budget" has become an all purpose tool in Washington. If deficit hawks don't want to adequately fund national defense or build a missile defense system they trot out the 'balanced budget.' If they want to raise taxes, they promise a balanced budget. If they don't want to reduce taxes; they fret that a 'balanced budget' will never be achieved.

Deficit hawks typically have two things in common. The first is that they want a balanced federal budget while cutting few, if any, federal programs, and the second is that they simply don't understand what causes deficits in the first place.

The single most important principle in real deficit reduction has heretofore escaped most politicians and beltway pundits: the budget deficit is not a revenue problem; it is a spending problem. The irony is that most self professed "deficit hawks" happen to be some of the beltway's biggest spenders. Bill Clinton, an expedient neo-deficit hawk, was able to dramatically increase federal spending and - by way of appallingly irresponsible fiscal slight of hand - claim considerable deficit reduction at the same time.

While trumpeting accomplishments like 'slashing the deficit' and achieving '$500 billion in deficit reduction,' the Washington press corps conveniently left out the details about the 1993 Clinton budget. Voters would be wise to examine the real Clinton deficit reduction record before granting Clintonomics a four year encore.

"Fool me once, shame on you, fool me twice, shame on me" goes the old adage. What about "Fool me five times?"

The last five attempts at deficit reduction - in '81, '82, '84, '90 and '93 - have focused almost exclusively on the revenue side of the equation by either increasing tax rates or limiting tax reductions. In each case, the projections of the deficit hawks were wrong and the taxpayers lost. In 1981, for example, David Stockman persuaded Ronald Reagan that scaling back tax rate reductions from 30 percent to 25 percent and postponing implementation until the second half of his first term would produce a balanced budget in 1984. The result was that the deficit for 1984 jumped from zero dollars to $128 billion.

In 1982 the Tax Equity and Fiscal Responsibility Act (TEFRA) was designed to shrink the deficit to $59 billion by 1987 by taking back most of the previous year's tax reductions for business. The rosy projection of a $59 billion deficit in 1987 grew to $280 billion.

The Deficit Reduction Act of 1984 (DEFRA) took back even more of the tax cuts to business. The promised result was $100 billion in deficit reduction. Once again the tax hikes failed to reduce the deficit.

In 1990, George Bush betrayed his promise by passing what at the time was the largest tax increase in American history. Again, monumental tax increases were sold to the American people under the guise of deficit reduction, as President Bush promised a balanced budget by 1995. But the spending cuts never materialized, a recession ensued and the deficit ballooned.

In 1993, Bill Clinton broke his middle-class tax cut pledge by blaming the Bush Administration for faulty accounting. Clinton claimed that the Bush Administration underestimated the true size of the deficit by $50 billion over five years. In some sort of "new math" apparently borne out of the Goals 2000 Program, Clinton's plan to recoup the fifty billion dollar budgetary shortfall was to raise taxes in excess of two-hundred and fifty billion. (In his book The Agenda, Bob Woodward confirmed deputy budget director Alice Rivlin's statements that the Clinton team knew all along what the real deficit numbers were.)

For all its budget cutting rhetoric, the 1993 Clinton budget deal failed to eliminate one single program. Not the honey subsidy. Not the mohair subsidy. Not even funding for screw-worm research. Instead, Clinton cavalierly chose to increase domestic spending by 20% over five years or $328 billion. Seeing that the Clinton Administration would accelerate domestic spending at a pace 91% faster than the rate of inflation, the Congressional Budget Office warned that the deficit would begin to rise dramatically after 1996.

The CBO recently affirmed its 1993 assessment of the long term effects of Clinton's wild spending. Despite the fact that the Republican Congress reduced discretionary spending for the first time since 1969, the carnage of Clintonomics had already gone too far, too fast. The budget deficit will rise to $144 billion this fiscal year, increase to $171 billion in 1997, $194 billion in 1998 and $403 billion in 2006.

The media have been conspicuously silent in affixing any responsibility for the upward deficit spiral to Clinton's economic policy. However, the reason for the increasing budgetary shortfall goes beyond deficit spending.

Exactly how did the Clinton Team achieve $500 billion in 'savings' if they didn't cut anything? Half of the money came from the seldom mentioned 1993 retroactive tax increase. The other $250 billion in 'savings' came from the Clinton Administration's dangerous game of short-term refinancing of the national debt.

Bill Clinton's unprecedented manipulation of the public debt in order to mask the size of the deficit and increase domestic spending will soon come home to roost as short-term interest rates have risen seven times since Clintonomics began.

Clinton's gamble reversed a forty year policy of insulating the national debt against short-term market fluctuations by locking the debt service into stable, long-term fixed financing. As Martin Armstrong, Chairman of the Princeton Economic Institute, has pointed out, the Clinton Administration has shifted financing of 70% of the national debt to five years or less with 33% financed for less than one year! What this means is that a modest rise in short-term interest rates could cause the deficit to increase dramatically.

Under Ronald Reagan, as in previous administrations, 60-70% of the national debt was financed long-term. As a result, variations in short-term interest rates had less of an effect on interest payments as compared to the present. This long-term financing provided a cushion of about four years between the time interest rates rose and the time that they affected interest payments. With Clinton's short-term financing in place, that cushion has shrunk to less than two years, making the job of debt management tricky at best and excruciatingly difficult at worst.

This has become self evident as interest payments are now growing at a rate in excess of 10% annually, crowding out all other spending. In the coming years, Clintonomics will accelerate the budget shortfall and simultaneously place significant downward pressure on long-term economic growth. Armstrong makes this compelling point: "We are now collecting more than $100 billion in revenue over and above defense and program spending. The deficit exists solely due to interest payments of which more than 20% are paid to non-domestic investors."

When American citizens hold United States government debt instruments, their earnings are taxed as a capital gain. However, government debt held by foreign entities escapes taxation. "In effect," says Armstrong, "we are exporting tax receipts for the first time in American history thanks to Clintonomics." Ironically, the architects of big government have been trapped by the consequences of their own excessive spending. The very principle of Keynesian economic theory is that continuous deficits stimulate the domestic economy. This argument is rendered meaningless when a large and growing portion of the debt service is exported to foreign interests.

To comprehend the gamble of Clinton's debt-refinancing scheme requires little more than a simple household budgetary analogy. Imagine that you have your home mortgage locked into a fixed 30 year note. You decide you would love to have a new sports car but don't want to work a second job to pay for it. So, you tell your banker that you would like to 'float' your monthly mortgage payment on whatever short-term interest rates happen to be at the time. In doing so, you lower your monthly mortgage payment and free up the funds to purchase the sports car. But what happens if short-term interest rates rise? How do know what your payments will be next month, or next year, or five years from now? You don't. And if the bond market turns and interest rates rise, you risk losing both your home and your new car.

In similar fashion, Bill Clinton wagered the health of the American economy when he bet his re-election that short-term interest rates would remain low. History indicates this is a sucker bet. A modest two point rise in short-term interest rates will produce a $150 billion increase in the deficit.

The volatility of the market not only works against Clinton's claims of deficit reduction but scrambles long-term balanced budget projections as well. Short-term interest rates have risen seven times during the Clinton presidency. At times, short-term interest rates have risen faster than long-term interest rates, "Exactly the policy taken back in 1981 to slow the economy" noted Armstrong, producing "the weakest postwar recovery in terms of the number of jobs created - less than half of the (number of jobs) of the Reagan period."

The fiscal legacy of the Clinton presidency will be lost opportunities for legitimate deficit reduction. During his first two years under a Democratic controlled Congress, Bill Clinton vetoed nothing. Since Republicans swept the House and Senate in 1994, he has vetoed eight bills that would have significantly reduced spending, including two balanced budgets. He has been alternately for deficit reduction when it meant tax increases and against deficit reduction when it meant real spending cuts.

In 1993, President Clinton needed the vote of Rep. Tim Penny (D-Minnesota) to pass his first budget. In exchange for Penny's vote, Clinton promised to find $106 billion in spending cuts later that year in order to meet the budget cutting goals of the Penny-Kasich Deficit Reduction Plan. Penny stipulated that these must be "real" budget cuts, not ethereal "baseline" budget cuts. On November 22, 1993, Penny-Kasich, which would have cut $103 billion of wasteful federal spending, fell by a 219-213 vote.

Clinton campaigned vigorously in support of reneging on his promise to Tim Penny. "The amendment as a whole is flawed and must be rejected," President Clinton wrote in a letter to House Speaker Tom Foley. Said Clinton, "We must reject the temptation to use any budget gimmicks to hide from the specific choices that are needed for long-term economic renewal." Added Alice Rivlin, "substantial additional deficit reduction at this time could slow the growth of the economy at a crucial point."

In October of 1993 - less than two months after Clinton's budget was passed - he was already taking credit for a robust economic recovery which had actually begun in the last three quarters of the Bush Administration. A few weeks later as Penny-Kasich was being considered, the debate turned to real budget cuts. Suddenly, the economy was redefined as perilously fluttering on newfound wings as Clinton implored Congress to "not take risks with our now fledgling economy."

Clinton's agenda had cross-pollinated. Outcome Based Education was mixed with economic policy as the health of the economy was no longer determined by empirical data. Rather, it was conveniently determined by the legislative needs of the day.

Consider the irony: in February, 1993 a $50 billion budget gap posed a monumental fiscal crisis which could only be remedied by $250 billion in new taxes. If deficit reduction were so urgent, then why was the specter of Penny-Kasich - which also would have been implemented over five years and only amounted to 1 cent on the dollar of federal spending - such a threat to our "fledgling economy."

The long-term effect of Clinton's irresponsibility will certainly be more money skimmed off the trust funds - Social Security, Medicare and Government Employee Pension Plans - in order to obfuscate the size of the deficit.

The federal budget can certainly be balanced. But tax relief should not be held hostage by deficit hawks who have shown neither the political will nor the sincerity to achieve balance in an honest manner without resorting to Arkansas financing schemes, retroactive tax increases or trust fund raids. Moreover, the federal budget should be balanced by forcing Washington to tighten its belt, not by asking the taxpayers to tighten theirs.

The American people hope that Washington will soon learn what every small businessperson, accountant and husband and wife have known all along: if you really want to balance a budget, it's the spending, stupid.

Mark Anthony is a political analyst and the author of "Vanishing Republic, How Can We
Save The American Dream?

Copyright 1996, Mark Anthony Communications


Fem Force:Force-based institutions like capitalism or the male dominated family unit are used as the basis for a conservative reality that harms women and poor