President Clinton will be remembered for many things, but in the economic arena, fiscal responsibility will top the list. When he took office in 1993, the federal budget deficit came in at $255 billion, just off its high of $290 billion in the previous year. The Congressional Budget Office was projecting deficits as far as the eye could see, with spending expected to exceed revenues by more than $400 billion in 1999. Yet the fiscal 1999 surplus should total about $107 billion, according to the CBO, which figures that the Annual surpluses will keep growing, reaching $381 billion by2009. And the estimates could be low, since the CBO assumes inflation-adjusted growth of about 2% annually over the next two years and 2.3% thereafter. If growth is faster, the surpluses could be fatter. It's been a major accomplishment indeed to reach this state. Now, Clinton and his successor need to ensure that this budget and future ones promote economic growth. A single-minded focus on paying down the national debt isn't necessarily the right formula for the next decade.
The deficit reversed on Clinton's watch for three key reasons: higher tax rates were adopted, statutory caps on spending were enacted, and economic growth picked up while inflation and interest rates fell. In the 1980s, as deficit spending rose, the financial markets drove interest rates higher, which in turn raised the government's borrowing costs and further inflated the deficit. Recently, the process has been working in reverse: As spending was reined in and the deficit began to shrink, interest rates tumbled and borrowing costs fell. High-cost debt was replaced on the government's books by lower-cost debt, and that virtuous circle will continue as old debt is retired.
Now the debate is what to do with these surplus dollars. The Republicans want a tax cut right away, so Americans can get an immediate boost in earnings; the President, meanwhile, would have the federal government set aside about 80% of the annual surpluses to cover problems in Social Security and Medicare financing down the road.
Both approaches leave something to be desired. To be sure, over the long run U.S. growth would benefit from a cut in marginal personal and corporate tax rates. However, as Federal Reserve Chairman Alan Greenspan recently pointed out, a tax cut at this time runs the danger of overheating the economy. Once growth returns to a more sustainable pace, an across-the-board cut in marginal rates deserves priority. And putting the better part of the surplus in a lockbox to help finance Social Security and Medicare in the future seems draconian--as does Clinton's suggestion that the government reduce national debt to levels that prevailed in 1917. It may make for good public relations but it doesn't necessarily make for good policy.
It's certainly prudent for President Clinton to worry about the solvency of the government's entitlement programs. But Clinton's budget and surplus plans give a decided edge to the elderly and don't focus enough on the young. To help the economy build on its strengths, Washington should promote investment in human capital. Numerous economic studies have demonstrated that investment in people delivers much higher returns than investment in physical capital. While there's still debate about which investments work best, everything from the Head Start program and early childhood education to adult training and retraining should get more attention than they do in Clinton's budget.
Then too, research and development deserve a boost. Here, the budget contains some modest initiatives. What's needed is a serious stimulant to basic research, which has been lagging in recent years. Without continued gains in education and training and new innovations and scientific findings--the raw materials of growth in the New Economy--the technological dynamic will stall. No question, belt-tightening has been good for the U.S. economy. Now the trick is to figure out how to parcel out the rewards of self-discipline in the most productive way possible for the economy.