Budget Blowhards: Why the Budget Debate Is Destined to Become Ever More Painful

There are few exercises more entertaining than ridiculing the nonsense that comes out of the mouths of leaders in Washington. The great part is that this is completely bipartisan. Neither party has a monopoly on solemnly stated absurdities. And, of course, we never have to worry about running out of material.

The winner in last week's contest was John Kasich, the former Republican chair of the House Budget Committee and the current governor of Ohio. National Public Radio (NPR) interviewed Kasich in the context of a piece on the state of the negotiations over raising the debt ceiling.

NPR introduced Kasich by saying that he was chairman of the House Budget Committee “when he balanced the budget with President Clinton in the 1990s.”

Kasich is then quoted as saying:

At the end of the day, you look yourself in the mirror, and you say to yourself, 'Did I do what was right for families and for children, and if I paid a political price, so what?'”

The story then concludes:

“That's the kind of attitude the president wants in his meeting Thursday. Come to the White House, he says, but leave your rhetoric at the door.”

Pretty touching isn't it? It may even be inspirational. After all, a politician who is willing to do what is right even at risk to his career is a rare bird.

It also happens not to be true. The Washington press corps is living some bizarre delusion about the balanced budgets at the end of the Clinton years. They didn't come about from politicians making tough choices. They came about from much stronger than expected economic growth and the willingness of Alan Greenspan to ignore the economic orthodoxy and not shut down the expansion.

This can be easily seen by just looking at the projections from the Congressional Budget Office (CBO). In 1996, the CBO projected that the year 2000 budget deficit would be $244 billion (2.7 percent of GDP). Instead, the economy ran a surplus of $232 billion, or roughly 2.4 percent of GDP. This involves a shift from deficit to surplus of $476 billion or 5.1 percentage points of GDP. This would be equivalent to reducing the annual deficit by $750 billion in 2011.

While Kasich and NPR tell this shift from deficit to surplus as being the result of politicians making the tough choices to cut spending and raise taxes, this is simply not true. According to the CBO, the net contribution to deficit reduction of Mr. Kasich's courage was minus $10 billion. In other words, the sum of the impact of legislated spending cuts and tax increases to the budget over this four-year period was to add $10 billion to the deficit.

The main reason that the budget went from deficit to surplus was that the economy grew much faster than expected and unemployment fell much lower than the consensus in the economics profession said was possible. In 1996, the CBO projected that the unemployment rate would be 6 percent in 2000. It was actually 4 percent.

This happened in large part because Greenspan ignored the economic orthodoxy and allowed the economy to keep growing even after the unemployment rate fell below the 6 percent threshold that most mainstream economists viewed as a lower floor. They expected inflation to take off if the unemployment rate fell to 5 percent, and certainly to get out of control at 4 percent.

Greenspan ignored the orthodoxy and overrode the objections of the leading economists at the Fed, who were Clinton appointees. Had the Clinton appointees gotten their way and the Fed adhered to economic orthodoxy, then the budget never would have shifted into surplus. This is all easy to see with a quick look at the CBO publications.

I promised that budget blowhard mocking would be bipartisan, so let's also take a moment to ridicule President Clinton. Clinton gave an interview with the National Journal last week which was titled, “A lost decade: Bill Clinton reflects on the reasons for the economy's struggles since he left office 10 years ago.”

The piece has Clinton telling us how they did things right in the '90s with the idea that this will be a recipe for future prosperity. Incredibly, the piece never mentions the stock bubble that was the economy's main driver at the end of the '90s. The collapse of this bubble, at the time the largest asset bubble in the history of the world, gave us the 2001 recession and the longest period without job growth since the Great Depression (until now).

The piece also doesn't mention Clinton's high-dollar policy. The overvalued dollar made US goods uncompetitive in world markets and led to a soaring trade deficit by the end of the Clinton years. The massive trade deficit and the imbalances it implied created the basis for the housing bubble.

If we had reality-based politics, Clinton would be hiding under a rock, not lecturing us about the route to economic prosperity. In fact, Clinton even had the gall to tell us how to create manufacturing jobs through trade, apparently overlooking the fact that the economy lost manufacturing jobs each of his last three years in office.

The facts are fairly simple here and they are 180 degrees at odds with the stories on the budget and the economy in the major news outlets. But the budget blowhards have the money and the power, so we will be hearing much more from them. We can at least enjoy playing the ridicule game.