It is understandable that many Americans are coming to the conclusion that the problems of the federal government’s deficit have at last been laid to rest. After all, the President’s budget package enacted last fall made a much publicized “down payment” on eliminating the deficit; and Clinton’s insistence in his fiscal year 1995 budget proposal on maintaining the cuts he earlier promised suggests a clear departure from the complacency of the last twelve years. The near-term projections are encouraging: it is possible that for the first time in half a century the annual federal deficit may shrink (in dollars) for four consecutive years. With the economy improving, and with health-care reform now attracting far more attention than fiscal policy, we are losing our sense of urgency about the need to stop the ongoing growth in our national debt.1
That is a serious mistake. In fact, the debt is a far more intractable problem than most politicians and policy professionals are willing to admit—at least in public. True, last year’s budget deal was designed to save $500 billion over the next five years (with the “savings” calculated as reductions from a sharply rising projection of deficits), and it is projected to reduce the annual deficit from 4.0 percent of the Gross Domestic Product (GDP) in 1993 to 2.2 percent in 1998. Seen from a different angle, however, the prospect for the deficit during the 1990s doesn’t look so bright. Even with the recent improvement, the money borrowed by the US Treasury to finance our deficits will still siphon off nearly half of all net savings made by US businesses and households—a far greater share of savings than deficits typically consume in any other industrial nation. Thanks to Clinton, America has been spared an explosion in the publicly held national debt in the near term—but the debt is still due to rise in dollars more over the next ten years than over the previous ten.
What is more remarkable is how little Clinton’s first budget has altered the long-term outlook. After 1998, the year the deficit is expected to sink to its low point, its share of GDP is expected to grow again each year. Deficits will rise to 3.3 percent of GDP by 2004, to 5.0 percent by 2010, and to 10.0 percent by 2020.2 As the economist Benjamin Friedman of Harvard recently wrote in these pages, no nation can expect to prosper if its public debts continuously increase faster than its income. Yet on our current budget trajectory, the national debt will keep climbing as a share of the economy into the next century: from a postwar low of 25 percent of GDP in 1974 to 55 percent in 2004, to 67 percent in 2010, and to 112 percent in 2020. The last figure approximately equals the previous record reached in 1946, after a ten-year depression and a five-year world war.3
Some may ask how anyone can make such long-term projections for the federal deficit.…
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