Memories

"It’s surprising how much of a memory is built around things unnoticed at the time”
--Barbara Kingsolver

Congress People, U.S. Senators, Cabinet officers, policy makers, journalists, bloggers and just about everyone else in the political universe of Washington have incredibly bad memories. The last time that the United States balanced its budget was just a decade ago. Even though this is not ancient history, almost no one in a government leadership position, in Congress or the U.S. Senate, or even in the media seems to remember how our great country managed at that time to go from large deficits at the start of that decade to a government with large surpluses ten years later.

Since our government is politically facilitated by a two-party system (even the Tea Partiers are wolves in Republican clothing), there are of course two versions to the story: A Republican one and of course a Democratic one. For the Democrats, President Clinton is the hero of the day. In this version, his decision to raise taxes in 1993 and to simultaneously reduce spending was the key to balancing the budget.

For the Republicans, the hero is Newt Gingrich (I know, it is almost impossible to believe). In this version, the Republican Congress that took power in 1995 after a rousing victory at the mid-term polls (sound familiar), demanded severe spending constraints. These constraints were ultimately the primary cause of the budget being balanced.

As always, there are the facts to set everything straight and as most attempts at determining the truth of a historical event go, this one is relatively easy.

In the spring of 1996, the non-partisan Congressional Budget Office (CBO), whose numbers are taken as the gospel in Washington, projected that the government would have a deficit of $244 billion in 2000 or roughly 2.7 percent of our nation’s Gross Domestic Product (GDP). Instead, the government actually experienced a budget surplus in 2000 of almost the same size. This created a shift from deficit to surplus of more than five percentage points of GDP, an amount that in our current economy would equal $750 billion.

The reason we begin with 1996 is that this is when President Clinton’s tax increases and spending restraints were all in place and it was also just after all the spending restrictions put in place by the Gingrich Congress had been passed into law.

So, even though the CBO was aware of all the deficit reduction measures being deployed by both political parties, it still projected a $244 billion budget deficit for 2000. Interestingly enough however, the changes to the budget in the subsequent years were opposite of what was expected. According to the CBO’s assessment, the legislated changes between 1996 and 2000 actually added $10 million to the budget surplus.

The phenomenon that got the United States from the large deficit projected for 2000 to the surplus that we actually experienced that year was much stronger than the projected growth. The CBO stated that growth would average just 2.1 percent when it actually averaged almost 4.3 percent. Even more critical, instead of ending the period with an unemployment rate of a projected six percent, unemployment in 2000 averaged only four percent.

It would be helpful if those in Congress, particularly the tea partiers, would pay more attention to history, since it would demonstrate to them that despite their manic concern over the deficit as opposed to spurring economic growth, it is economic growth that just might be the best way to lower the deficit. There is one constant in the history of industrialized nations: It is all but impossible to balance a nation’s budget when it is shackled with an unemployment rate of more than eight percent.

If, through stimulating the economy, we could bring the unemployment rate down to pre-recession levels of five percent, we would make huge steps in the direction of a balanced budget with no real need to slash and burn.

If the Paul Ryan’s and Michele Bachmann’s of the world could remember back to the 1990s then they might be pushing more aggressively for measures to spur growth. This would include not only more fiscal stimulus, but also more action from the Federal Reserve Board. The Fed, love them or hate them, has consistently been restrained in its attempts to boost the economy because of the incessant whining of the Republican right in Congress and now on the campaign trail.

The Fed, together with the Treasury and with the encouragement of Congress, should be pushing for a de-valuation of the dollar. A fiscal policy that is explicitly designed to reduce the dollar’s value would at the same time provide a boost to net exports, consequently helping to enable economic growth.

Finally, if the Fed opted to hold the bonds that it has purchased through its various quantitative easing programs it could then directly reduce the deficit. This would happen because the interest paid on these bonds is paid to the Fed and then refunded to the Treasury. It therefore creates a no net interest burden to the government. If the Fed bought and held $3 trillion on government bonds, it would lead to interest savings of close to $1.8 trillion over the course of the next ten years.

If our frenzied deficit reducing Congress people and Senators had better memories along with some creativity, we would all be talking about things like faster grown and increasing the Fed’s holdings of government bonds. But alas, we are instead talking about the privatization of Medicare, block granting Medicaid, cutting Social Security, and cutting as much out of the federal budget as possible.

That is what happens when a small but extremely vocal group of people seize control of the issues and subsequently the media and they say things like, “I find it interesting that it was back in the 1970s that the swine flu broke out under another, then another Democrat president, Jimmy Carter. I’m not blaming President Obama now I just think it’s an interesting coincidence” (Michele Bachmann speaking on the state of the U.S. economy, April 28, 2009).

Huh?