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is always very welcome...
Bentsen Op-Ed on the Deficit
Where Does the Deficit Come From?
An Op-Ed that I drafted the bulk of for Lloyd Bentsen, and
of which I am quite proud. It ran in the Wall Street Journal
on November 3, 1994.
Last week Alice Rivlin and I released our two
agencies' final report on the deficit in what is called the 1994
"fiscal year"--the accounting period that ran from October
1, 1993, to September 30, 1994. The federal deficit was $203 billion.
Fiscal 1994 was also the federal government accounting period
covered by President Clinton's first budget: the economic growth
and deficit reduction budget proposed in February 1993, and enacted
in two cliff-hanging one-vote victories at the beginning of August
When President Clinton took office, we projected that--if the
Administration did nothing--the deficit would be $302 billion
in fiscal 1994. It is extremely good news that the President's
leadership in cutting spending, the positive response of the economy
to the President's plan that boosted revenues, and some good luck
on "technical" matters that affect spending together
gave us a fiscal 1994 budget deficit nearly $100 billion lower
than we had feared at the start of 1993. And it is extremely good
news that, because of the President's deficit-reduction program,
we are now projecting that the current fiscal year, fiscal 1994,
will see a deficit of $167 billion or so, or 2.4 percent of America's
total national income.
But $167 billion a year is still a substantial deficit. It may
be smaller, relative to the size of the economy, than any of the
deficits during the administrations of Presidents Bush and Reagan.
But, relative to the size of the economy, it is larger than all
save one of the deficits during the administrations of Presidents
Kennedy, Johnson, and Nixon.
Yet the past five years have seen two substantial deficit-reduction
programs enacted, in 1990 under President Bush--who demonstrated
real courage then in putting the long-run health of the American
economy above his own political career--and under President Clinton's
leadership in 1993.
Why then does the federal government still have a substantial
Some claim that the continued existence of the deficit proves
that the government's appetite is always out-of-control: something
in Washington-maybe in the water-forces Congresses and Presidents
to always push spending well beyond reasonable limits. But when
I take a look at where the deficit comes from, I see that such
claims are not true. Our current federal deficits have a single
source: they are the hangover from the borrow-and-spend bender
that the government tied on in the 1980s.
If we had balanced the budget since 1981, we would now have no
For example, let's look at our projections for the current fiscal
year, fiscal 1995. We now project that during fiscal 1995 the
federal government will collect $1,354 billion, or 19.0 percent
of national income, in taxes. It will spend $1,297 billion on
all programs combined, or 18.1 percent of national income. The
federal government will take in $57 billion more than it spends
on all programs combined, from Social Security and Medicare to
the FBI, from unemployment insurance to the Air Force.
Why then a deficit? Why do we not project a $57 billion surplus?
Because substantive programs are not the only source of checks
written on the Treasury. In addition, I have to pay interest on
the outstanding national debt. As of the end of President Carter's
last budget, fiscal 1981, the total national debt amounted to
This debt is still outstanding--every time we have paid off one
of the bond issues that were outstanding at the end of fiscal
1981, we have raised the money to pay off the bondholders by borrowing
again. In fiscal 1995, we are going to spend $51 billion in interest
on that portion of the national debt that pre-dates the budgets
of the 1980s. But if the pre-1981 debt were our only national
debt, as would be the case if we had balanced our budgets throughout
the 1980s, we would still be running a surplus: the $57 billion
excess of revenues over spending on programs would provide enough
to pay the interest on the pre-1981 debt, and leave a surplus
of $6 billion or so besides.
In addition to the $785 billion of debt that existed at the end
of fiscal 1981, there is an extra $2,665 billion of debt that
has been borrowed since. The interest we owe on this, post-1980
portion of the debt, amounts to $174 billion in fiscal 1995. Interest
on the post-1981 debt alone is more than our entire projected
deficit this fiscal year.
This is why I say that our current deficits are not the result
of an inherent and omnipresent out-of-control government appetite.
Instead, they are the result of the borrow-and-spend policies
that have run up $2,665 billion of national debt since the end
of fiscal 1981.
In the 1980s we went on a national bender, cutting taxes and raising
defense spending, without making provision for the long-term fiscal
soundness of the government. Now we have a national hangover,
a $2,665 billion worth of debt hangover that gives us an extra
$174 billion of interest payments, and our current $167 billion
It was a heck of a bender, it is a heck of a hangover, and--for
a Treasury Secretary at least--it is a heck of a deficit headache.
We are no longer on our bender--revenues are more than enough
to cover program spending. But we still have the hangover, and
the headache. How should we deal with this headache that is the
Some politicians seem to want to propose hair-of-the-dog: another
round of unfunded tax cuts and defense spending increases, on
the principle that if it felt good in the early 1980s maybe it
will feel good enough in the late 1990s to make us forget our
hangover. But I can't recommend hair-of-the-dog. If we tried it
I would feel very sorry for whoever is Treasury Secretary a decade
from now, who will have five times the debt-and-deficit headache
that I do.
I recommend that we take some aspirin and go about our business.
Indeed, that's what President Clinton asked us to do in his 1993
deficit-reduction plan. We do feel much better: as a share of
our national resources, the 2.4 percent of GDP deficit of 1995
is half the size as a share of national product as the 4.9 percent
of GDP deficit of 1992.
And as we go about our business, let's never forget that the source
of our headache today is not anything we are doing today, in terms
of federal revenues and program spending, but that we really tied
one on last decade.
Professor of Economics
J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax