Bill The Giant Deficit Killer? Not Yet

It was supposed to be the day for proclaiming the Clinton economic miracle. On Oct. 24, the President addressed the City Club of Cleveland, while three of his top economic advisers fanned out to make their pitch. The big news: New calculations show that last year's budget deficit dropped to $203 billion.

Voters might be forgiven if they're a little underwhelmed. Clinton was declaring the deficit cut as the first step in "a comprehensive economic strategy designed to empower American workers to compete and win in the 21st century." Yet the deficit-trimming amounted to only $52 billion from the previous year. The deficit for fiscal 1995 is projected to fall again--to $167 billion--but that is still far too high for the fifth year of an economic recovery. If so much red ink can gush in good times, what will happen when times get hard?

Failure has had nearly as big a hand in Clinton's deficit trimming as did his 1993 budget package. The deficit might not be falling if the President had been able to pass his ill-timed $16 billion emergency economic-stimulus package in early 1993 or his extravagant health-care package in 1994. "We need some reform of the health system, but Clinton's was the wrong policy and promised more than it could deliver" in cutting overall health costs, says Susan Tanaka of the Committee for a Responsible Federal Budget.

BREAKING POINT. Clinton's own policy successes did matter in cutting the deficit, of course. The Administration's five-year, $433 billion deficit-reduction plan passed in 1993 is Clinton's single biggest accomplishment so far, dwarfing all the fiscal-policy work done during the Bush Administration. And although the package was flawed by too many tax hikes and too few spending cuts, it was about as big a program as Congress could swallow. After all, it passed with only a one-vote margin in both the Senate and House. And it was about as radical a surgery as the economy seemed able to tolerate at the time. "If Clinton had tried to push through a plan to get a surplus by now, we'd be in a depression and have no chance of a surplus any time soon," says Perry D. Quick, a top economist at Ernst & Young.

But that doesn't mean the job is done. The deficit will begin heading up in 1996, to $190 billion, and the cost of financing this accumulating debt is growing relentlessly. Interest on the debt already exceeds the total of all federal spending for education, science, law enforcement, transportation, housing, food stamps, and welfare. And because of the failure of any health-care reform, nothing has been done about runaway entitlement spending. Half of the expected increase in federal outlays over the next five years will come from higher federal spending on health-care costs.

And yet the urgency of the problem is matched only by Washington's reluctance to take the next step. That much became clear when Republicans got a copy of an internal memorandum, entitled "Big Choices," from Office of Management & Budget Director Alice M. Rivlin, that outlines the possible solutions. Republicans were "shocked, shocked!" to discover that the White House believes that further deficit slashing could require cutting into entitlements and raising taxes.

STRONG ANALYSIS. Unfortunately, the Democrats panicked. The President backpedaled furiously. Clinton even claimed to a Cleveland radio station that the Rivlin memo simply cataloged changes that might be forced on a reluctant White House by irresponsible Republicans in Congress. Rivlin, a lifelong deficit hawk, had to disown her work as a mere what-if exercise. Senate Budget Chairman Jim Sasser (D-Tenn.), locked in a close race for reelection, wrote in to oppose cuts to Social Security, Medicaid, and home-mortgage-interest deductions "in the strongest possible terms."

In reality, Rivlin had merely done her job, producing a smart analysis of the problems ahead. In contrast to the phony math of the Republican Contract for America--for tax cuts and balanced budgets--Rivlin advised the Administration to "continue our established policy of explicit and paid-for proposals."

And that means cutting the budget where it is growing fastest--entitlements such as Social Security, Medicare, and farming subsidies. As White House Chief of Staff Leon E. Panetta noted on the same day as Clinton's Cleveland speech, "the deficit is not just a statistic. It is the most regressive tax in the country--a tax passed on to our children." If Clinton wants to return to Cleveland next year--and make some real news on the deficit--then he'll have to study Rivlin's Big Choices. Nothing else will work.

    Before it's here, it's on the Bloomberg Terminal.