May 16, 2011
The NYT has an article discussing the possibility of an automatic spending cut rule as a mechanism to hit deficit targets. It quotes President Obama’s budget director, Jacob Lew, on the past success of such rules.
Mr. Lew credits such budget rules for reaching a balanced budget in the 90s. Actually, these rules were of limited value relative to much better than expected economic growth. In 1996, the Congressional Budget Office (CBO) projected a deficit in the year 2000 of 2.7 percent of GDP. The government actually ran a surplus of 2.4 percent of GDP, a shift of 5.1 percentage points of GDP, the equivalent of $750 billion in today’s economy.
According to CBO, none of this shift from deficit to surplus was the result of spending constraint or tax increases, its scoring shows that legislated changes over this 4-year period actually raised the deficit by $10 billion. By far the biggest reason that the budget shifted from a large deficit to a large surplus was much better than expected economic growth.
This growth pushed the unemployment rate down to 4.0 percent in 2000. CBO projected that it would be 6.0 percent. Mr. Lew should know that it was economic growth, not spending constraints that led to the Clinton surpluses. The NYT should have pointed this fact out to readers.
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