When President Clinton first met with his economic team (of which I was a member) in early 1993, the federal deficit amounted to about 5% of gross domestic product, and the federal debt was growing faster than output. Even if the anemic economic recovery then under way were to strengthen -- an eventuality not judged likely at the time -- large deficits were projected to persist, acting as a drag on growth. Clinton's advisers warned him that cutting spending or increasing taxes to reduce the deficit could slow the economy in the short run. They also cautioned that, while deficit reduction would reduce interest rates and stimulate investment and growth in the long run, both the timing and the size of these beneficial effects were uncertain. Despite these warnings, Clinton embraced deficit reduction as a policy to restore confidence in the credibility and creditworthiness of the U.S. government in global markets and get the economy back on track. His decision paid off. Economic causation is complex, and many factors played a part in the strong economy of the 1990s. But without Clinton's 1993 economic plan -- which did not attract a single Republican vote in Congress -- the robust recovery of the 1990s would have been choked off by rising structural deficits, rising interest rates, and declining national saving.
Today's economic picture bears an uncanny resemblance to the one confronting Clinton in 1993. As Alan Greenspan observed in a recent speech: "The relatively optimistic short-term outlook for the U.S. economy is playing out against a backdrop of growing long-term concern in financial markets about our federal budget." What an understatement! The ratio of federal receipts to federal spending has collapsed. Large budget deficits -- over 5% of GDP, excluding the Social Security and Medicare trust funds -- are projected every year right up to when the first baby boomers start to retire.
President Bush has trashed the fragile bipartisan consensus that emerged at the end of the 1990s to dedicate the temporary surpluses in these trust funds to reducing government debt. The Bush economic team has had the audacity to argue that sizable persistent deficits will not harm the economy's long-run performance. This is economic nonsense. Sustained reliance on government borrowing leads to some combination of a reduced domestic capital stock and increased indebtedness to the rest of the world. Either way, Americans' claims on the nation's future output and their future living standards will be reduced.
The Bush Administration suggests that the 2001 and 2003 tax cuts -- which, if made permanent, would amount to more than three times the cost of making Social Security solvent -- will boost the economy's long-run growth. But the Administration's tired supply-side logic has failed to convince even the Republican-dominated Congressional Budget Office, which recently concluded that the Bush tax cuts were likely to reduce future economic growth.
Under Bush's leadership, the government has made a series of inconsistent promises that, taken together, cannot be honored: promises of future Medicare and Social Security benefits, promises of substantial investment in military and homeland security, promises of leaving no child behind, promises of generous corporate subsidies and tax breaks, promises of timely repayment of federal debt, and promises of tax rates far below those necessary to cover its other commitments.
Something has to give. But what? The answer is apparent in the basic conservative Republican goal that has guided Administration economic logic from the beginning and motivated Greenspan's support for the Bush tax cuts: a big reduction in government spending on social programs. Wrapping itself in discredited supply-side rhetoric and occasional self-serving Keynesian arguments, the Administration has exposed the nation to a long-term fiscal crisis to achieve this goal. In the process, Bush has squandered America's budget surpluses and undermined the reputation for fiscal responsibility that Clinton bequeathed to the nation. Laura D'Andrea Tyson is dean of London Business School