Deficit reduction in Bill Clinton’s first budget

On January 27th, 1998, during his State of the Union, President Bill Clinton boasted of major progress in reducing the annual federal budget deficit.

“When I took office, the deficit for 1998 was projected to be $357 billion and heading higher,” he said.

“This year, our deficit is projected to be $10 billion and heading lower. For three decades, six Presidents have come before you to warn of the damage deficits pose to our nation. Tonight I come before you to announce that the federal deficit, once so incomprehensibly large that it had 11 zeros, will be, simply, zero. I will submit to Congress for 1999 the first balanced budget in 30 years.”

One week later, James Bennet of the New York Times wrote, “President Clinton unveiled the first balanced Federal budget in almost 30 years today.”

Bennet added, “Critics of Mr. Clinton argue that it was the Republican Congress after 1994 that enforced fiscal discipline, and some analysts believe it is the strong economy, more than than anything, that has balanced the budget.

“But for the Administration, the end of deficit politics is vindication of the economic strategy Mr. Clinton has pursued since taking office in 1993, and his economic team basked in the applause at the White House today.”

Whether you credit the administration, Congress, a strong economy, or all three, by the end of his first year, Clinton had secured the adoption of an economic package that combined tax increases (which fell mainly on the upper class) and spending cuts (which hurt mainly impoverished Americans). His 1993 economic package passed without a single Republican vote in either chamber of Congress—and in the face of that party's dire predictions that it would result in economic chaos. Subsequently, the deficit declined from $290 billion in 1992 to $203 billion by 1994. By 1999, surging tax revenues from a booming economy had generated a surplus of $124 billion, a development few would have thought possible immediately after Clinton was elected.

In the Miller Center’s Clinton Oral History Project, Alice Rivlin, who was the Deputy Director of the Office of Management and Budget under Leon Panetta before eventually becoming Clinton’s OMB Director, remembers the first year discussions that set the administration on its course.

With the benefit of hindsight, those first year budget decisions may seem straightforward, but there were several critical questions at the time. Was the economy strong enough to withstand the macroeconomic effects of deficit reduction? How important was deficit reduction in the short term compared to the long term? Could you combine deficit reduction with some form of stimulus? How would deficit reduction impact the “Putting People First” promises of the campaign—and the need to invest in America’s infrastructure, among other things?

Listen as Rivlin remembers the process and President Clinton’s involvement. A transcript of the conversation is below.

 

Alice Rivlin: The first question was how much deficit reduction. There was a spectrum of views about that even among the economic team. We had at least one meeting in Little Rock at which we explicitly discussed how much deficit reduction, because you needed to decide that before you put the package together. We debated different formulations. 

The deficit for fiscal year ’92 was $290 billion, and all the projections showed the deficit rising. It didn’t much matter what you assumed about the economy, it was headed up to very high levels, through $300, $400 billion over the next several years. I think everybody felt strongly that that couldn’t be allowed to happen. We had to reverse that. So there were various proposals about the goal. 

The one that finally won was that we would reduce the deficit in half in four years. So half of 290 is 145. But there were those who thought that was too much reduction. Laura Tyson and Alan Blinder were concerned about the macroeconomic impacts of that. The economy was weakish in ’92. It wasn’t actually as weak, it turned out, as we thought it was.

The Miller Center’s Russell Riley: We hear that a lot when we interview [George] Bush Administration people. [laughter]

Rivlin: Well, they’re partly right. The economy was beginning to recover, and it wasn’t as evident how strong it was, even in ’92. I think this half the absolute number was a Bentsen proposal. I may even at some point have wanted to go further than that. But the others—the less aggressive group was saying, "Let’s be less aggressive on the deficit." Laura and Alan were saying, "Well how about cutting the deficit as a percent of GDP in half?" That was less aggressive. It all sounded sort of esoteric, but it really was a question of how much risk you want to take of another recession.

We went back and forth on that. I was on what was considered the hawk end, along with Leon [Panetta] and [Lloyd] Bentsen—as I remember it—and Bob Rubin. Bob was actually very strong on deficit reduction, but was trying to play his honest broker role here and get all the arguments on the table. Somehow I believe at that Little Rock meeting, we came out with this $145 billion by four years from now, which I guess we interpreted as fiscal ’96 or ’97. That was the compromise.

However, that’s just the economic team. You also had the political folks who had been running this campaign and talking about all the things that the new President was going to do: a middle-class tax cut, a big investment in infrastructure, national health insurance—although that wasn’t the word they were using. Everyone was going to get health insurance. There had been a lot of campaign promises in this document called Putting People First, of which Gene [Sperling]was the principal author. The political folks were saying, "Hey, wait a minute. We’ve got to deliver on these promises that we made in the campaign, and if you’re doing all this deficit reduction, you can’t do that." So that was really the fight. 

There was a discussion within the economic team on how much deficit reduction, but then, as the package was being put together, and the political folks realized this means no money for all the things we promised to do. They were very upset. Because there were infrequent meetings between the two groups, I think I didn’t realize how upset they were at the beginning.

Riley: Is this before you actually took office? Or is this after the inauguration?

Rivlin: It overlaps. I don’t remember. 

College of William & Mary Professor John Gilmour: I want to clarify something before you keep going. When you reached this decision to try to reduce the budget deficit by $145 billion over four years, was that just the economic team, or was the President involved?

Rivlin: Oh, the President was in all of these meetings. The thing that’s really important to understand about Bill Clinton is that he was a full participant in all of these budget meetings. Bob Rubin’s role was to orchestrate it a little bit so that the meeting did move from one subject to another and had a clear agenda. But Clinton was running the meeting, all these meetings, and they went on and on—

Gilmour: He would have been cognizant of the impact of this decision on the Putting People First program.

Rivlin: Well, yes, as it moved along he would have been, but we were all experimenting. We decided on the number, and then you had to go through the budget and say, "Well, all right, how do we get there? How much tax increase and what kind? How much spending cut and what kind?" So the implications for the spending side of the budget in detail were not immediately apparent. They had to be worked out in this marathon series of meetings that went on forever and ever. Those were, as I remember it, mostly meetings with the economic team, and separately the political folks were fussing at him and saying, You can’t do this. This is a disaster. 

Now, there was some overlap. George Stephanopoulos, I think, was in all the meetings, and Gene by this time now, by the time we got to the White House, was Rubin’s deputy. But he had also been very much a part of the political team, so he was in both. But then there were the political consultants like Paul Begala, who felt very strongly. They were doing polls, and they were saying to the President, "This deficit reduction, nobody cares about deficit reduction. The polls don’t show that you have to do this, and it’s a disaster for what you want, what you promised to do." I wasn’t in most of those meetings. The political polling folks were meeting separately with the President and saying, "You’re going down the wrong track here, and these economic team people are just green eyeshade folks who don’t understand politics."

But at the beginning at least, I was unaware of how strong the pull was from the other side, because I saw the President only in the economic meetings. There, he was working with us to try to figure out, okay, how do we do this. And we were spending hours talking about alternative tax proposals, energy tax, BTU tax versus gasoline tax, and various other tax options. There were a lot of them. The characteristic of these meetings was that somebody would prepare a paper that would have a whole bunch of options in it, and then you’d talk about them. 

The tax ones were coming out of Treasury, the spending ones were coming out of us, and then everybody would look at these things and debate them. We had a lot of debates. My memory of all this is that the process of meeting—the economic team and the budget discussion—is what was dominating my thinking. It was pretty continuous from the Little Rock meetings through the Roosevelt Room meetings where we finally put together this package. Things like the summit and the Inauguration were kind of a side show. 

My confirmation hearings—we had to be prepared for that, had to write a good statement, had to do all that stuff. But that was an interruption, in a way, in what I thought of as the main game. I guess from Leon’s and my perspective, there were two main games. One was getting up to speed in OMB, and the other was playing in this economic team discussion. Then every once in a while you got dressed up and went to some ceremonial event. It was absolutely exhausting. The meetings would go on—they usually convened late in the afternoon and went on through the early evening. Then the President usually had to go to some event. 

My main memory is being very hungry, because they would go through the dinner hour. Every once in a while the President would get hungry, and then he would call for something to be brought in. It was usually fruit and cookies. These things would be put on the table, and it was like a bunch of kids—Cabinet officers. We were all starving. We would be grabbing for the cookies, and they would disappear very, very fast. And the meeting would go on. That was my main preoccupation in the first few months of the Administration.

George Mason University Professor James Pfiffner: So this battle was taking place mainly in Clinton, because the economic team wasn’t talking directly to the domestic policy, you-have-to-keep-your-promises team. They weren’t clashing. You’re talking to Clinton, and then Clinton was talking to them, and it was settled—

Rivlin: There were some bridges, and Gene was the main bridge. I thought of Gene at the time as the keeper of the flame. He was the one who always said, "But Mr. President, in ‘Putting People First’ you said—." And he didn’t even have to have the book, he knew exactly what was in there. 

Pfiffner: Because he wrote it.

Rivlin: He was always reminding the President of what he said in the campaign and how important it was to deliver on these campaign promises. But I was only peripherally aware of the Begala stuff on polling. One other aspect of the budget that was very important at the time—sort of faded later—was the so-called stimulus package. We were genuinely worried—we, the economic team—that aggressive deficit reduction would harm the economy. 

Bentsen and Altman were convinced that deficit reduction would be good for the markets and would bring the interest rates down and that the interest rate stimulus would offset any negative fiscal effect. But Blinder and Tyson were not so convinced of that. What we decided on was, "Okay, we do this deficit reduction package, which reduces the deficit over four years, but we also want to do some investment in some of the things that the President had talked about in the campaign." By then I think we realized we couldn’t have a major infrastructure package. It was just too expensive. But we had some infrastructure—there were some roads and bridges in there. But mostly it was human resource investment. Investment became a term for anything good we wanted to do. These were plausible things in work force development, education, health—not health insurance, but health services—and so we put together this deficit reduction package on the one hand and this short-run stimulus, which was bringing forward  into fiscal ’93—summer of ’93, really—some of the things that we would have been spending in the next fiscal year. 

That was the answer to the question, "How do you know you won’t tank the economy with this deficit reduction?" Unfortunately, the stimulus package got very loose, not in terms of the total number, but in terms of the definition of what was in it. Probably in shopping it around the Hill, it began to look like a wish list of social programs that were not terribly expensive—because we didn’t have all that much money to spend—but were all over the lot. Some things got put in there that then made it seem silly, like midnight basketball. Midnight basketball was a perfectly plausible idea about having activities for inner city youth—get them off the street in the evening—but it sounded silly. 

There was also some CDBG [Community Development Block Grant] money, and then, of course, the opponents said, What does CDBG money get spent for? CDBG money gets spent for anything mayors want to do, basically. So they could find examples of CDBG money that had been spent for swimming pools or something, which could be made to sound frivolous. So when it was finally announced, there was ridicule of the stimulus package, and then with the economy strengthening, and the interest rates coming down—which they did—the stimulus package really proved unnecessary and was not enacted. 

But it was not implausible at the time. There was genuine worry that the deficit reduction would be excessive.

Riley: I’m looking at the interview that you did with CNN [Cable News Network] in February that shows up in the briefing books, and there’s a question about deficit reduction. Your reply is, "Because in the first two years we also have a stimulus program to get the economy going, we’re not really focused on deficit reduction in the first couple of years."

Rivlin: I read that last night, and I was surprised that I said that. But apparently I did. 

Riley: My assumption is that the transcript is correct. 

Rivlin: I assume that it is too—

Riley: It may not be, but I was surprised to see that also. And have wondered. Obviously your memory of this is different.

Rivlin: Well, I raised the stimulus package because I think we’ve all tended to forget that it was part of the original package. Because it was rejected and because it proved to be unnecessary, it slips out of everybody’s memory. But it was very central to what we thought we were doing at the time. The Republican reaction was, "Oh, this is just a bunch of Democrats. Democrats are big spenders. They want to do all this silly social spending." But from the point of view of the economic team, that wasn’t how it started. It started with a genuine worry that we would overdo the deficit reduction and get a weak economy.