In Defense of Public Debt by Barry Eichengreen

Author:Barry Eichengreen
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2021-09-15T00:00:00+00:00

Note: Debt increase is calculated using the exact years in the period, i.e., the change in the debt ratio between the start year (1984) and end year (1992).

But with recession in 1990 and the ensuing collapse of revenues, gimmicks no longer sufficed. Across-the-board spending cuts remained unpalatable to Democrats, however, while higher taxes were anathema to Republicans. At this point sequestration, desired by neither side, threatened to kick in. President George H. W. Bush and congressional leaders therefore drew up a budget that combined limited spending reductions with limited tax increases (requiring Bush to abandon his campaign pledge of “Read my lips: no new taxes” and causing him, arguably, to lose the 1992 election to Clinton).

Conservative Republicans, led by Representative Newt Gingrich, opposed the tax increases, however, and defeated the bill. Lacking a budget, the federal government shut down in October. Faced with this crisis (a government on hiatus and a looming war in Iraq), the parties reached a compromise in November. The Republicans accepted additional taxes but only on high earners, while the Democrats agreed to spending restraint. Negotiators replaced current cuts in social programs, which would have been an embarrassing climb-down for the Democrats, with a commitment to future spending restraint. The latter entailed targets for the spending growth, where permissible levels rose more slowly than inflation. Further increases in spending were subject to “pay as you go rules” that required either additional taxes or compensatory reductions in other programs.

The 1990 Budget Enforcement Act worked better than Gramm-Rudman-Hollings. Instead of committing Congress to a set of headline numbers while allowing the details to be fiddled, the 1990 act specified rules to be followed and actions to be taken. It delegated responsibility for forecasting growth and the deficit to the nonpartisan Congressional Budget Office (CBO) and the Office of Management and Budget. The CBO projected that the 1990 act would reduce the federal deficit by $500 billion over five years, a forecast that proved broadly correct. The deficit reduction delivered by this act was thus an inheritance, not an achievement, of the Clinton administration.

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