Academic journal article Policy Review

The Story of the Surplus

Academic journal article Policy Review

The Story of the Surplus

Article excerpt

VICTORY HAS A HUNDRED FATHERS and defeat is an orphan," as JFK said after the Bay of Pigs fiasco. As an illustration of this dictum, there are many claiming fatherhood, or claiming to know the father, of the current golden economy and one of its apparent progeny -- the federal budget surplus. Unfortunately, there is no DNA test for determining the real father of the economic successes of the past five years. The popular nominees -- among them Alan Greenspan, Bill Clinton, Ronald Reagan -- are likely to be found to have had an influence. But many people and things, known and unknown, planned and accidental, were players in the outcome. It's high time to ask and try to answer the basic questions about the surprising appearance of a federal surplus two years ago. Where did it come from? How closely tied is it to the economy or to the policy actions of Congress and the president? How realistic are the assumptions underlying the projections of huge surpluses over the next decade? And what should we do with these surpluses?

The history

IN FISCAL 1998, total revenues taken in by the federal government exceeded total federal spending, producing a surplus of $69 billion. (This is not the only definition of the surplus -- but more about that below.) In 1999 the total surplus grew to $124 billion. According to projections of the Congressional Budget Office (GBO), it is expected to be $179 billion (1.4 percent of GDP) this year and grow to about $500 billion in 2010. Over the period 2000-2010, the annual surplus is predicted to average more than 3 percent of GDP.

If this projection should be realized, it would be a marked departure from the past seven decades. As Figure 1 shows, we have not had many years of surplus since 1930 (10 to be exact). It is true that surpluses were more the rule than the exception during the first 30 years of the 20th century. (There was an unbroken string of 11 years of surpluses in the 1920s.) But those surpluses were generally less than 1 percent of GDP. Evidently, before surpluses could grow too large, they were reduced or eliminated by downturns in the economy or by tax cuts (before the 1930s) or spending increases (after World War II).

The historical data make it clear that wars and deep recessions have always been major causes of large deficits. The deficit reached 16 percent of GNP in World War I and 30 percent of GDP in World War II; and when the depression of the 1930s replaced the Roaring '20s, Calvin Coolidge's surpluses gave way to large deficits.

Lesser recessions and smaller wars (Korea, Vietnam) were also associated with deficits in the postwar period. But they cannot account for the trend of a widening deficit that began in the 1970s and grew to an annual average of 4 percent of GDP during the 15 year period 1980-94. That story is complex, involving the huge increase in the size and scope of the federal government after World War II and the rise of entitlement programs to a dominant share of budget outlays. The Reagan presidency marked the beginning of an ongoing national struggle over continuing growth in government, which likely had the effect of temporarily increasing the deficit. Rising federal outlays were not matched with rising taxes. But to do that likely would have put a permanent seal on higher spending levels.

Deficits if unchecked enlarge the national debt. Wartime deficits unavoidably increase the debt, which soared during World War II to a level well in excess of GDP (see Figure 2). Rapid growth in GDP during the 1950s and '60s reduced the ratio of debt to GDP, even though in absolute size the debt increased in most years because of continuing deficits. However, with growing deficits and slower growth in the economy, the debt eventually rose as a percentage of GDP from its post-World War II low point of 24 percent in 1974 to top out at almost 50 percent from 1993 to 1995. The recent shift from deficit to surplus has already had a favorable impact on the debt. …

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