Part Two: We actually paid our annual bills without borrowing the difference. How did we do it?
Yesterday I asked whether tax cuts really pay for themselves.
The evidence I found suggests that while tax cuts can stimulate economic activity, the resulting growth generally doesn’t produce enough additional revenue to replace everything the government gives up.
That left me wondering about the other side of the equation.
Have we ever actually gotten this right?
The answer surprised me.
For four consecutive years—from 1998 through 2001—the federal government took in more money than it spent.
No trillion-dollar annual shortfall.
No additional borrowing simply to make that year’s ends meet.
Think about how remarkable that sounds today.
So what happened?
Was it Bill Clinton?
Was it Newt Gingrich and the Republican Congress?
Higher taxes?
Lower spending?
A booming economy?
The answer turns out to be:
Some of all of them.
And a little good fortune besides.
It Started Before Clinton and Gingrich
The story actually begins with President George H.W. Bush.
By 1990, Washington had become increasingly concerned about persistent federal borrowing.
Bush reached a budget agreement with Congress that included spending restraints and higher taxes.
Politically, that decision was costly because he had famously promised:
“Read my lips: no new taxes.”
But the agreement also established rules designed to make Washington think harder about how it would pay for things.
One became known as PAYGO—“pay as you go.”
The concept was pretty simple.
If Congress wanted certain new spending or tax reductions, it was generally supposed to find savings or additional revenue somewhere else.
Congress also placed limits on portions of federal spending.
Washington was making it harder to simply put every new idea on the national credit card.
Then Clinton Made Another Difficult Choice
Bill Clinton became president in 1993 with the federal government still spending considerably more than it collected.
That year, Congress passed a deficit-reduction package.
Among other things, it raised taxes, particularly on higher-income Americans.
Republicans strongly opposed it.
Some predicted that higher taxes would damage the economy.
Instead, the economy entered one of the strongest expansions in American history.
Millions of people went to work.
Businesses grew.
Corporate profits increased.
The stock market soared.
And when people earn more and businesses make more money, the government collects more taxes.
Money coming into Washington began rising rapidly.
Then Newt Gingrich Arrived
Republicans took control of Congress after the 1994 election, and Newt Gingrich became Speaker of the House.
Clinton and Gingrich were hardly political buddies.
They fought over taxes.
They fought over spending.
They fought so bitterly that parts of the federal government shut down.
But something remarkable happened while they were fighting.
The government’s financial condition kept getting better.
Republicans pushed to restrain spending and balance the budget.
Clinton resisted some of their proposed cuts but also made deficit reduction an important part of his agenda.
Eventually, in 1997, Clinton and the Republican-controlled Congress reached a bipartisan budget agreement.
Neither side got everything it wanted.
Then something happened that neither side fully anticipated.
The Economy Took Off
As late as 1997, government forecasters still expected Washington to continue spending more than it collected.
Instead, the economy performed much better than expected.
Unemployment fell.
Productivity increased.
Corporate profits grew.
The technology boom sent the stock market soaring.
And that stock-market boom produced unexpectedly large amounts of tax revenue, particularly from capital gains.
Washington suddenly had far more money coming in than experts had predicted.
At the same time, a strong economy meant fewer people needed some forms of government assistance.
More money coming in.
Less pressure on some spending.
That’s a pretty good recipe for improving your finances—whether you’re the United States government or a family sitting at the kitchen table.
We Also Got a Break From History
There was another enormous advantage.
The Cold War had ended.
For decades, the United States had spent enormous amounts competing militarily with the Soviet Union.
After the Soviet Union collapsed, defense spending declined substantially relative to the size of the economy.
People called it the peace dividend.
Washington didn’t suddenly stop caring about national security.
The world had changed, allowing the country to devote a smaller share of its resources to defense.
Combine that with the booming economy and unexpectedly strong tax collections, and balancing the budget became considerably easier.
Then Washington Did Something Important
Washington could have spent all that unexpected money.
Politicians could have immediately created large new programs or enacted much larger tax cuts.
For a while, they largely resisted doing that.
That’s not to say Clinton and Gingrich suddenly became models of fiscal harmony.
They didn’t.
But Washington allowed much of the improvement to flow through to the government’s bottom line.
And in 1998, something happened that hadn’t occurred in decades.
The federal government took in more money than it spent.
Then it happened again in 1999.
And again in 2000.
And again in 2001.
For four consecutive years, Washington didn’t have to borrow money simply to cover that year’s bills.
So Who Gets the Credit?
This is usually where the political argument starts.
Democrats point to Bill Clinton.
Republicans point to Newt Gingrich and the Republican Congress.
Others point to George H.W. Bush and the politically costly budget agreement he signed in 1990.
They’re all part of the story.
But I’m reluctant to give any politician too much credit.
The economy performed far better than expected.
The stock-market boom produced unusually high tax revenue.
The end of the Cold War allowed defense spending to decline.
Those were enormous advantages no president or Speaker created.
But political choices mattered too.
Washington had adopted rules intended to discourage new borrowing.
Taxes had been increased.
Spending had been restrained in important areas.
And when unexpected revenue arrived, Washington didn’t immediately spend all of it.
Maybe the politicians’ biggest accomplishment was simply this:
For a while, they didn’t get in the way of the good fortune they had been given.
And Something Else Started Happening
When the government stopped borrowing as much money, something else improved.
Its interest burden became easier to manage.
Think of your own household.
If you carry a large credit-card balance, part of every month’s payment goes toward interest rather than something you’d actually like to buy.
Reduce the balance and eventually the interest bill comes down too.
The federal government works much the same way.
For a few years, America briefly had that cycle working in our favor.
Compare that with today.
CBO projects federal net interest spending of about $1 trillion in 2026, rising to roughly $2.1 trillion by 2036 if current law generally remains in place.
Debt produces interest.
Interest contributes to deficits.
Deficits produce more debt.
And the cycle continues.
Then It Ended
The good times didn’t last.
The technology bubble burst.
The economy entered a recession in 2001.
The September 11 attacks changed America’s national-security needs almost overnight.
Taxes were reduced.
Defense and homeland-security spending increased.
Wars followed in Afghanistan and Iraq.
Other federal spending increased as well.
By 2002, Washington was again spending more than it collected.
We haven’t recorded another annual unified federal budget surplus since.
What Can We Learn From It?
I don’t think the answer is simply to recreate Bill Clinton’s tax rates.
Nor is it to recreate Newt Gingrich’s spending priorities.
America is different today.
Our population is older.
Social Security and Medicare cost considerably more.
The international environment is different.
And we’re carrying vastly more debt.
But I think the 1990s still have something to teach us.
A strong economy matters enormously.
Adequate tax revenue matters.
Controlling spending matters.
Not immediately spending every unexpected dollar matters.
And perhaps most importantly, compromise matters.
Nobody Got Everything They Wanted
Bill Clinton didn’t get everything he wanted.
Newt Gingrich didn’t get everything he wanted.
Republicans didn’t get everything they wanted.
Democrats didn’t get everything they wanted.
George H.W. Bush made a budget deal that was politically costly.
Yet over the course of the decade, Washington went from borrowing hundreds of billions of dollars a year to taking in more than it spent.
Maybe the lesson of the 1990s isn’t really about Clinton or Gingrich.
Maybe it’s much simpler.
Living within your means requires saying no.
Sometimes to spending.
Sometimes to tax cuts.
Sometimes to your own political party.
And sometimes to voters who want government benefits without wanting to pay for them.
For four years, the United States demonstrated that balancing the federal budget wasn’t impossible.
We had some extraordinary good fortune.
But we also made some difficult choices.
We haven’t forgotten how arithmetic works.
The question is whether we’ve forgotten how to compromise.
Coming Tomorrow: If We Know the Cost, Why Don’t We Pay for It?
While researching Parts One and Two, something began bothering me.
Today Congress has an organization whose job is to estimate what proposed legislation will cost.
It’s called the Congressional Budget Office.
So if we have a reasonably good idea that a tax cut or spending program will add to the debt before Congress votes on it, why do we pass it without paying for it?
That’s tomorrow’s question.
Quote of the Day
“Politics is the art of the possible.”
— Otto von Bismarck
Perhaps governing is also the art of accepting that getting something usually means giving something else up.
Orchid of the Day
Today’s Orchid goes to politicians who are willing to compromise and accept 70 or 80 percent of what they want rather than accomplishing nothing because they couldn’t get 100 percent.
Compromise isn’t surrender.
Sometimes it’s how governing actually gets done.
Onion of the Day
Today’s Onion goes to anyone who claims one president, one Speaker, one political party or one policy single-handedly created the budget surpluses of the late 1990s.
The history is considerably more interesting than that.
Question of the Day
Would you be more willing to accept a political compromise you didn’t particularly like if you believed it would materially reduce the national debt?
How much compromise would you accept?
Lyrics of the Day
Yesterday’s answer:
“Sunny Afternoon” — The Kinks.
Today’s lyric:
“You can’t always get what you want.”
Name the song and the group and submit your answer in the comments section below.
Answer tomorrow.
Video of the Day:
Compromise is not a four letter word.
You always get what you want…. The Rolling Stones