NEW BUDGET ERA

March 9, 1999

Within a few months, the U.S. government will formally ended the long-standing practice of spending more money than it takes in. NewsHour historians discuss this monumental event and put it in historical context.

Feb. 1, 1999: Details of the president's fiscal year 2000 budget proposal. Oct. 21, 1998: Rudolph Penner and Robert Reischauer to discuss the details of the 1999 budget. Oct. 15, 1998: House Majority Leader Dick Armey and Gene Sperling discuss the budget agreement. Feb. 2, 1998: Debate over the President's budget proposal. Feb. 2, 1998: The details of the President's proposal. Jan. 9, 1998: Exploring the possiblities and plausibility of a budget surplus. Aug. 5, 1997: President Clinton signs a budget deal that will balance the books by 2002. July 29, 1997: Experts analyze the budget deal. May 2, 1997: Sen. Pete Domenici and Budget Director Franklin Raines discuss the budget agreement. Browse the NewsHour's coverage of the budget.

JIM LEHRER: The new world of surplus: Kwame Holman begins. KWAME HOLMAN: When the Balanced Budget Agreement was signed into law in the summer of 1997, an ever- improving economy already was driving down annual federal deficits. In fact, within a few months, the President and members of Congress actually began discussing what to do with a budget surplus. Still, this moment was historic, because it formally ended the Federal Government's long-standing practice of spending more money than it takes in. The Balanced Budget Agreement was designed to end nearly 30 years of deficit spending, a streak that began quietly during Richard Nixon's second year in office. But by 1982, Ronald Reagan's second year in office, the federal deficit reached $128 billion. By 1985, it topped $200 billion. And so, Congress passed and the President signed a deficit reduction bill named for its sponsors, Senators Gramm, Rudman, and Hollings. Its aim was to zero out deficits by 1991. What it also did was increase partisan tensions on Capitol Hill. REP. WILLIAM GRAY, Chairman, Budget Committee: (1987) We have met the Gramm-Rudman target by $200 million more than the President. These assumptions will show that we have reduced the deficit more than the President. In fact, our deficit reduction is stronger than the President's under any set of assumptions. REP. DILBERT LATTA, (R) Ohio: It sounds to me, in listening to your comments, this is a real April Fool document. It's a typical Democrat document. You promise everything to everybody, and at the same time say you're going to reduce the deficit. And I just don't think that's going to work. I think it's another tax-and-spend, and tax-and-spend-and-whack defense budget. KWAME HOLMAN: Ultimately, Congress couldn't meet its Gramm-Rudman deficit targets, so it simply set new, higher targets, and the deficit continued to climb. In 1990, President George Bush reluctantly broke his campaign pledge and agreed to use tax increases, along with spending cuts, in hopes of reaching a balanced budget within five years. PRESIDENT GEORGE BUSH: When you get into somebody's pocketbook, or you get worrying about a tax or a spending cut that affects someone, I've learned that it's just not going to be done the way I want it, especially if you don't control the Senate or you don't control the House. KWAME HOLMAN: But again, a partisan budget battle ensued. REP. DAN BURTON: (1990) Hundreds of thousands of people will lose their jobs and it will be on our heads. We don't need a tax increase folks, we need to cut spending. REP. LEON PANETTA: Is it perfect? Far from it. Is it painful? With half a trillion dollars in deficit reduction, how could it not be? Is it the package that I or any of you would have designed, or, for that matter, the President? Absolutely not. Of course not. It's a compromise. KWAME HOLMAN: However, the deficits continued to mount, reaching $290 billion in 1992. That, and a slumping economy, contributed to President's Bush defeat in his bid for reelection. A year later, President Clinton's own plan for tax increases and spending cuts made it through Congress with Democratic support alone. At the moment the bill passed some House Republicans mockingly waved good-bye to Democrats, predicting they would suffer at the polls for their vote. One year later, Democrats lost majorities in both Houses of Congress. VICE PRESIDENT GORE: President Bill Clinton. KWAME HOLMAN: When he released his year 2000 budget a few weeks ago, President Clinton recalled the 1993 vote and recognized one member of Congress in particular. PRESIDENT CLINTON: Congressman Jay Inslee from Washington is one of the people who lost his seat in 1994, in no small measure because he voted for the economic plan of 1993. And in 1998, the voters in Washington returned him to the House of Representatives, and I'm delighted to see him. Thank you, sir. Stand up. (Applause) Thank you. KWAME HOLMAN: On numerous occasions, President Clinton also has credited the '93 vote with helping turn around an economy that eventually began producing more tax revenue than expected for the Federal Government. That further reduced the deficit, and helped ensure the President's reelection in 1996. Republicans, too, take some credit for the economic turnaround, citing the spending limits they installed once they took control of the Congress. REP. JOHN KASICH, Chairman, Budget Committee: (1996) We have saved more money in the first 17 months, standing on principle and fighting for our goals in the first 17 months, saving $23 billion more than any Congress since World War II, and that is just terrific. KWAME HOLMAN: Annual federal deficits no longer are on the books, but the national debt is. That's the accumulated damage from running deficits year after year. How Congress and the President intend to deal with that is the subject of a new budget debate in Washington. JIM LEHRER: And Margaret Warner takes it from there. MARGARET WARNER: Some perspective now on what this shift from a deficit to a surplus era may mean. It comes from three NewsHour regulars: Presidential Historians Doris Kearns Goodwin and Michael Beschloss, and Journalist and Author Haynes Johnson. Joining them tonight is Herbert Stein, Senior Fellow at the American Enterprise Institute and Former Chairman of the Council of Economic Advisors during the Nixon and Ford administrations. Welcome all. MARGARET WARNER: Mr. Stein, put this in context for us, an even longer historical context than Kwame just gave us, in terms of moving into at least some kind of an era of surplus. How big a change is this? HERBERT STEIN, Nixon/Ford Economic Adviser: Well, if you look back at our history a long way, it's not such an unusual situation. After the Civil War for 50 years or more, back down to 1915, we gradually reduced the debt, we ran surpluses on the average, and we reduced the debt from about 30 percent of the national income to about 3 percent. Then we had another surge of deficit spending during World War I and we went through another decade after that of debt reduction -- and deficit reduction -- surpluses and debt reduction. Even after World War II when the debt was up to over 100 percent of the national income, although we ran deficits for a while, they were very small. And the ratio of the debt to the national income declined from over 100 percent to about 25 percent in 1974, which was coincidentally the last year of my service in the government. Since then it has increased a great deal to about 50 percent. But -- so this is not a unique situation that we should have some surpluses. In olden days it would have been considered natural that after a period in which you ran big deficits, you would then run some surpluses. MARGARET WARNER: So Doris, what made it okay, politically okay, to run large deficits and to keep running large deficits? DORIS KEARNS GOODWIN, Presidential Historian: Well, I'm not sure that it really was politically a popular thing to do. It's just that there were certain kinds of constraints built into the spending side, things that were very popular programs like Medicare, like Social Security, and it was very hard to undo them. So those mandatory spendings kept going year by year, and at the same time it became tough for people to take the courageous stands for tax increases, which they finally took, which is what eventually turned it around partly. Although, I think before we give too much credit to the administration, although I think they deserve some, so do the Republicans, so do the Democrats. As they say, if defeat is an orphan, than success has a thousand fathers, in this case it does, but it seems the big change is the economy's productivity. It's grown 4 percentage points these last years, productivity even higher than that partly due to oil prices being low, partly due to technology, so reaching out over other countries where you've got computers in everybody's hands. Stores - you look at those supermarket scanners, and they can figure out what their inventories are in our country, so they know how to stock. They can thereby make profits without raising prices. So I think we have to give credit to the country and the people as a whole. And that's why after we talk about this longer, I hope those people as a whole get to somehow share in this better than they're doing now. MARGARET WARNER: Haynes, let's go back to the deficit area, though, just for a couple more minutes. How do you think it shaped our politics? You've been covering this for 30 years. How -- it really dominated our politics, didn't it and our national priorities? HAYNES JOHNSON, Journalist/Author: Absolutely. And Herb Stein, of course, we could bring him back and he would have solved everything, I think - MARGARET WARNER: Never would have had the problem in the first place. HAYNES JOHNSON: We wouldn't have had the problem in the first place - but if you just think about it, when Ronald Reagan, for instance, ran for President, he made his central theme that we were a debt-ridden society. I remember looking down into Congress when he made his first address to the United States Congress on February 18, 1981 and he had this wonderful metaphor. It was about the debt that was going to do us in. And he said, Do you realize we have just almost hit $1 trillion of the national debt - that is, all the money the United States had spent for its wars and the expansion in space in its entire history was about to hit this horrifying level of $1 trillion. He said -- and only Reagan could do this - "Do you know what that means?" He said, "If you had a stack of dollar bills and put 'em end on end it would go 67 miles up to the Moon." Later on, it went to 130 miles by the time he left because the deficit tripled in his -- the national debt, rather, tripled during his administration. And it became the central piece really about this -- how do you spend the national treasure? Do you give it back? If you have a surplus, do you give it back to the people in tax cuts, or do you do something else with it? Do you put it in programs? That's the -- this is --absolutely drives our politics and what we have now in the new era of surpluses, if they are surpluses, and lastly surpluses is going to be that kind of debate over spending or whether to tax, whether to give it back, spend it how? So that's where our politics is. It's going to be there. HERBERT STEIN: I don't really think that the deficit surplus thing has been important in national politics. It is a cliché that every candidate likes to say that the deficit is a terrible thing and I want to balance the budget. But we went on for 50 or 60 years regularly electing people who did not balance the budget, who ran bigger and bigger deficits. I don't think really - I really don't think the American people care much about these accounting matters. MARGARET WARNER: And let me get Michael Beschloss in here. Michael, many Democratic observers of the Reagan years and even some Republicans said that actually Ronald Reagan meant to drive up these huge deficits because he meant to force very hard choices and reduce the size of government, at least what went for domestic spending. Do you think it did force hard choices for the good? MICHAEL BESCHLOSS, Presidential Historian: It did to some extent, although I think the greater reason that he ran those deficits was that he wanted to increase the defense budget in a way that would break the Soviet Union, and he felt that was more important than balancing the budget. And that's something that historians may ultimately agree on. But I think Herb Stein is actually not giving enough credit to his own party, the Republicans. Since the early 1930's, people like Herbert Hoover and Alf Landon and the others have all said it should be a paramount goal of American Presidents and the American Congress to balance this budget. That's the argument that they made for 60 years. It was very unpopular during World War II and during the period thereafter. Dwight Eisenhower in the 1950's, especially in the late 1950's was making a huge effort to keep that budget balanced at the cost of an enormous recession that cost the Republicans the Congress in '58 and probably defeated Richard Nixon. It was so popular that deficit spending remain that by the time Richard Nixon became President in 1969, as Herb Stein will remember, he said, "I am a Keynesian; I am someone who is willing to tolerate deficit spending. I think that's not a bad idea." And so what you've seen is that the Republican view of the last 60 years finally triumphed in the 1980's and 1990's, and you now see both Democrats and Republicans, the Republicans and Bill Clinton all saying, "We all agree that a balanced budget should be paramount. We only disagree on how to spend the surplus." DORIS KEARNS GOODWIN: But I could take the opposite point of view. MARGARET WARNER: Go ahead, Doris. DORIS KEARNS GOODWIN: I mean, I think the opposite point of view could be that the Democrats starting with Franklin Roosevelt, who unlike Herbert Hoover understood that a balanced economy was not the end, a balanced budget the end in itself, even though he believed in it fiscally, when he came into the Depression, and he saw the needs of people, the human needs of people who were out of jobs losing their homes, he was willing to unbalance the budget to meet those human needs. And then, as his administration went on, he recognized even when the war came that if you somehow used Government spending for the GI Bill of Rights, to protect labor, to do the minimum wage, for Social Security, you'd invest in your people, and the people would be what make that economy grow. And I think you could still argue today that in the 60's when the Democrats were in power and that economy grew at that time, it was partly because the Government invested in its people. And the risk I think we're running now is if we make the surplus and a balanced budget an end in itself and we don't invest in our people once more, in the infrastructure, in education, then the economy is not going to grow in the long run. The balanced budget is helping it in the short run now, but it's not an end in itself. We've had plenty of other times when it wasn't balanced and we did just fine. MARGARET WARNER: Haynes, do you think we have any reason to expect the parties, though, to have a different view about what to do with the surplus than they did what to do in a time of deficit? In other words, last year we still heard, the first year of a budget surplus, we heard Republicans talking about tax cuts and Democrats talking about some additional domestic spending. HAYNES JOHNSON: You asked about the issue as a political issue in our debate. Michael talked about the last 60 years and he's correct. If you remember, during the Roosevelt period that Doris talked about, Harry Hopkins, Roosevelt's chief aide in the New Deal period, and chief operative, issued this famous or made a famous statement. It may have been mythological, but it became part of political lore, we will tax and tax, spend and spend, and elect and elect. Republicans ran against that kind of idea for the entire period of the New Deal and on well into the 50's, 60's, 70's and 80's. And whether it was false or not, that framed an issue, the Democrats were the taxers and the spenders. The Republicans were the party of thrift and frugality and balancing budgets. Now, the reality economically may be entirely something else but that' still is the kind of issue you're hearing debated. Today in the House and Senate the Republicans are talking about how to get back a tax cut to the Americans, and the Democrats are saying, no, we want to save it, preserve it for Social Security and Medicare. That's the kind of debate that we're going to have; we've had it really for decades. MARGARET WARNER: So do you think -- go ahead, Herb Stein. I'm wondering whether you think the politics are going to change in this era of surplus. HERBERT STEIN: Well, I think that the division will be as Haynes said, that is, that there will be great demand on the Republican side for cutting taxes, there will be some demand on the Democratic side for increasing spending. But I think in looking at this history, we've overlooked some important things. The main reason we got to the surplus was that defense spending went down, interest on the debt went down partly because interest rates went down, and revenue went up partly because the economy was thriving. And so it became easy. It was not a hard job in those circumstances to develop a surplus. Now the test for us is going to be whether having the surplus in our hands we're going to disburse it with tax cuts on the one hand or expenditure increases on the other hand, or going to reduce the debt. But I don't think either side is especially more committed to reducing the debt than the other one. MARGARET WARNER: Let me get Michael in here for a last word. How do you think the politics of surplus are going to be different - if at all - from the politics of deficit? MICHAEL BESCHLOSS: Well, you know, it doesn't really cut between the two parties the way that it used to because what you'd expect would be that the Republicans would be sort of like Eisenhower in the 1950's saying let's use this in the most conservative way possible, perhaps to reduce the debt -- certainly not on big federal spending programs. And you would expect the Democrats to do what Doris has suggested, which is to say let's turn on the spigot, let's spend it on health and education, housing, welfare, the city - sort of like LBJ in the 1960's. And the problem is you don't have that debate represented by two parties with opposing views. Both parties are for balanced budgets, and I think one problem is that when you don't have one party making the argument that, yes, in certain times there should be big federal spending, I think our politics is going to be impoverished for it. MARGARET WARNER: All right. Well, thank you all four very much. We'll see.