year for nearly a decade. I loved being with old friends, playing touch football on the beach with kids and a few rounds of golf with a new set of clubs Hillary had given me. I enjoyed attending the discussion panels, where I always learned things from people who talked about everything from science to politics to love. That year, I especially liked one entitled “What I’d Tell the President over a Brown Bag Lunch.”
Meanwhile, President Bush was going out in full stride. He visited our troops in Somalia, then called me to say he was headed to Russia to sign a strategic arms limitation treaty, START II, with Boris Yeltsin. I supported the treaty and said I was prepared to push its ratification in the Senate. Bush was also being helpful to me, telling other world leaders he wanted me to “succeed as President” and that they would find me “a good man to work with” on important problems.
On January 5, Hillary and I announced that we would enroll Chelsea in a private school, Sidwell Friends. Until that time, she had always been in public schools, and there were some good ones in the District of Columbia. After discussing it with Chelsea, we decided on Sidwell primarily because it guaranteed her privacy. She was about to turn thirteen, and Hillary and I wanted to give her the chance to live out her teenage years as normally as possible. She wanted that, too. On January 6, with only two weeks to go before the inauguration, and the day before my first meeting with my economic team, the Bush administration’s OMB director, Richard Darman, announced that the coming year’s budget deficit would be even higher than previously estimated. (My staff was convinced Darman had known about the larger deficit earlier and had delayed his bad-news announcement until after the election.) Regardless, now it was going to be much more difficult to juggle the competing priorities: to cut the deficit in half without weakening the fragile economic recovery in the short run; to find the right combination of spending cuts and tax increases necessary to reduce the deficit and increase spending in areas vital to our long-term economic prosperity; and to ensure more tax fairness for middle-and lower-income working people. The next day, the economic team gathered around the dining-room table in the Governor’s Mansion to discuss our dilemma and explore which policy choices would produce the most growth. According to traditional Keynesian economic theory, governments should run deficits in bad economic times and balanced budgets or surpluses in good times. Therefore, the combination of tough spending cuts and tax increases necessary to halve the deficit seemed to be the wrong medicine for the present moment. That’s why FDR, after being elected on a promise to balance the budget, abandoned deficit reduction in favor of big spending to put people back to work and stimulate the private economy. The problem with applying the traditional analysis to current conditions was that under Reagan and Bush, we had built in a large structural deficit that persisted in good times and bad. When President Reagan took office, the national debt was $1 trillion. It tripled during his eight years, thanks to the big tax cuts in 1981 and increases in spending. Under President Bush, the debt continued to increase again, by one-third, in just four years. Now it totaled $4 trillion. Annual interest payments on the debt were the third-largest item in the federal budget after defense and Social Security. The deficit was the inevitable result of so-called supply-side economics, the theory that the more you cut taxes, the more the economy will grow, with the growth producing more tax revenue at lower rates than previously had been collected at higher ones. Of course it didn’t work, and the deficits exploded throughout the recovery of the 1980s. Though supply-side theory was bad arithmetic and lousy economics, the Republicans stayed with it because of their ideological aversion to taxes, and because, in the short run, supply-side was good politics. “Spend more, tax less” sounded good and felt good, but it had put our country in a deep hole and left a cloud over our children’s future. Coupled with our large trade deficit, the budget deficit required us to import tremendous amounts of capital every year to finance our overspending. To attract that kind of money and avoid a precipitous drop in the value of the dollar, we had to keep interest rates far higher than they should have been during the economic downturn that preceded my election. Those high interest rates inhibited economic growth and amounted to a huge indirect tax on middle-class Americans who paid more for home mortgages, car payments, and all other purchases financed through borrowing.
After we sat down to work, Bob Rubin, who was running the meeting, called on Leon Panetta first. Leon said the deficit had gotten worse because tax revenues were down in the sluggish economy, while spending was up, as more people qualified for government assistance and health-care costs soared. Laura Tyson said that if current conditions continued, the economy would probably grow at a rate of 2.5 to 3 percent over the next years, not enough to lower unemployment much or to ensure a sustained recovery. Then we got down to the meat of the coconut, as Alan Blinder, another of my economic advisors, was asked to analyze whether a strong deficit-reduction package would spur growth and new jobs by bringing down interest rates, since the government wouldn’t provide as much competition with the private sector in borrowing money. Blinder said that would happen, but that the positive effects would be offset for a couple of years by the negative economic impact of less government spending or higher taxes, unless the Federal Reserve and the bond market responded to our plan by lowering interest rates substantially. Blinder thought that after so many false promises on deficit reduction over the last few years, a strong positive response by the bond market was unlikely. Larry Summers disagreed, saying that a good plan would convince the market to lower rates because there was no threat of inflation as the economy recovered. He cited the experience of some Asian countries to support his view. This was the first of many exchanges we would have about the power over the lives of ordinary Americans exercised by thirty-year-old bond traders. Often my loud complaints about this, and Bob Rubin’s retorts to them, were funny, but the issue was dead serious. With national unemployment stuck at above 7 percent, we had to do something. Tyson and Blinder seemed to be saying that, for the longterm health of the economy, we had to cut the deficit, but that doing so would slow down growth in the short term. Bentsen, Altman, Summers, and Panetta bought the bond-market argument and believed deficit reduction would accelerate economic growth. Rubin was just running the meeting, but I knew he agreed with them. So did Al Gore.
Bob Reich missed the meeting but sent me a memo the next day, arguing that while the debt was a higher percentage of the gross domestic product than it should be, investment in education, training, and non-defense research and development were all at a much lower percentage of GDP than in the preReagan years, and underinvestment was hurting the economy as much as the big deficits. He said the goal should not be to cut the deficit in half but to return it, and investments, to the percentage of GDP they had been before the Reagan-Bush years. He argued that the investments would increase productivity, growth, and employment, enabling us to reduce the deficit, but if we went for deficit reduction only, a stagnant economy with anemic revenues couldn’t cut it in half anyway. I think Gene Sperling pretty much agreed with Reich.
While I was mulling it all over, we moved on to a discussion about how to achieve the deficit reduction we needed. In my campaign plan,
In the campaign, in addition to the budget cuts, I had also proposed raising a comparable amount in new revenues, all from wealthy individuals and corporations. Now, to cut the deficit in half we would have to raise more revenues, too. And we would almost certainly have to scrap the broad-based middle-class tax cut, though I was still determined to cut taxes for working families earning about $30,000 a year or less by doubling the Earned Income Tax Credit. Those people’s incomes had been losing ground for twenty years, and they needed the help; moreover, we had to make lower-income jobs more attractive than public assistance if we were to be successful in moving people from welfare to work. Lloyd Bentsen went over the list of possible tax increases, saying that any tax would be hard to pass and the most important thing was to prevail. If our plan failed in Congress, it could endanger my presidency. Bentsen said we should present a number of options to Congress, so that if I failed to pass one or two, I could still claim success and avoid being crippled politically.
After the tax presentation, Roger Altman and Larry Summers argued for a short-term stimulus package to go with the deficit-reduction plan. They recommended about $20 billion of spending and business-tax reductions that at best would give the economy a boost, and at the least would prevent it from sliding back into a recession, which they thought was about a 20 percent possibility. Then Gene Sperling made a presentation of options for new investments, arguing for the most expensive one, about $90 billion, which would meet all my campaign commitments immediately.
After the presentations, I decided the deficit hawks were right. If we didn’t get the deficit down substantially, interest rates would remain high, preventing a sustained, strong economic recovery. Al Gore strongly agreed. But,
