The deficit is big enough to take care of itself

Posted: May 13, 2003 12:00 AM

President Reagan famously quipped, "I'm not worried about the deficit -- it's big enough to take care of itself."

Taken at the time as out-to-lunch insouciance, Reagan's quip was right. The budget deficit took care of itself, a fact worth recalling in light of the deficit angst currently tormenting Democrats everywhere.

Democrats invoke with longing the Clinton administration's approach to the deficit in the 1990s, and they should, so long as it is properly understood. How to summarize it in a word? "Relax."

President Clinton would like to claim that his 1993 budget plan erased the deficit. Republicans would like to claim that their kamikaze anti-spending charge in 1995-'96 did it. In fact, both parties were largely spectators as economic growth trampled the deficit for them.

The soaring economy created a wave of new income, corporate and capital-gains tax revenue that made a stark irrelevance of Washington tax and budgetary policy.

From 1995 to 2000, individual income taxes as a percentage of gross domestic product increased from 8.1 percent to 10.2 percent, even though there was no tax increase in those years -- in fact, the opposite. Clinton signed a tax cut in 1997.

That year the budget went from a $200 billion projected deficit in 2002 to a projected surplus in roughly nine months. Both Clinton and Republicans would, again, like to attribute the final lurch toward balance to their efforts, in this case their 1997 bipartisan budget deal. That's a laugh.

As former Clinton Labor Secretary Robert Reich has noted, the deficit "began to vanish during the spring and summer of 1997, even before the White House and Congress reached agreement, with great fanfare, on how to make it do so officially." Indeed, the 1997 budget deal even slightly increased the deficit in its first year.

The robust growth of the late 1990s had another benign effect: It created a tight labor market that increased the wages of lower-income workers. Clinton understood this potential uplift for the poor early in his administration, when he abandoned plans for liberal spending programs, aka "investment" -- "All the folks that I ran to help would be more hurt by a slow economy than they would be helped by a marginal extra investment program."

Want to "soak the rich" by getting them to pump more revenue into federal coffers? Want to reduce the deficit? Want to help the poor? The key to it all is economic growth.

In which case, the question is what policy will best create an environment conducive to growth. Clintonites argue that deficit reduction itself stoked growth in the 1990s, by reassuring markets and reducing interest rates. This is a matter of hot dispute, but even former Clinton economist Alan Blinder, a defender of this view, says it worked only in "a particularly fortuitous set of circumstances."

Those circumstances from 1992 -- a market worried about a potentially free-spending liberal in the White House, a deficit that was a relatively high 4.7 percent of GDP -- don't apply today. Bush is trying to boost the economy into higher growth when the deficit is a more manageable 2.8 percent of GDP.

One can disagree about the "fairness" of his tax cuts, but few economists would argue that they hurt the economy, and most would agree that -- all things equal -- they probably help. What alternate policy do Democrats propose to create more growth?

Deficit reduction? According to an analysis of congressional Democrats' budget plans by the anti-deficit Concord Coalition, Democrats simply spend all the money that Bush would devote to tax cuts on programs from Medicare to education.

They would do well to recall another lesson from the 1990s: A growing economy creates more tax revenue, which can, in turn, be devoted to higher spending. In the booming late 1990s, Clinton and Republicans could afford routinely to agree to levels of spending above statutory spending "caps."

So, cut taxes now to grow more later. The deficit? It's big enough to take care of itself.