Clinton was right to put the US back in the black

Diane Coyle on the battle to cut spending

Something extraordinary and almost unnoticed has happened. Uncle Sam is back in the black. The US Federal Government is starting to spend less than its income from taxes for the first time since 1969. In the current financial year the federal budget deficit is likely to amount to only 0.3 per cent of GDP, and in fiscal year 1998 it is likely to be in surplus.

The recovery from George Bush's pre-election blow-out, which took the deficit to 4.4 per cent of GDP, a whopping $330bn, in 1992, has been remarkable. While the two most recent Republican presidents, Ronald Reagan and George Bush, turned out to be about the most financially profligate in modern American history, Bill Clinton has certainly been the most responsible.

He has been helped by the remarkable US economic performance in the longest recovery since the war. Tax receipts have grown steadily with the economy, while demands for cyclical payments like unemployment benefit have fallen back. There has been extra help from special factors. For example, the government's healthcare bill has at last started to grow more slowly as increased competitive pressures with the spread of "managed care" has capped the expansion in Medicare and Medicaid outlays.

Even if the economy slows in 1998, as it almost certainly will, the budget deal struck between the President and Congress will keep the government's finances on an improving trend. The non-partisan Congressional Budget Office and Office of Management and Budget are likely to predict a small deficit next year, making cautious assumptions. But most Wall Street analysts expect a small surplus. Chase Securities, for example, predicts it will be $25bn in the black.

Some critics have despaired of President Clinton's adherence to financial orthodoxy, much as many Labour supporters criticise Gordon Brown for outdoing the Tories on tough public spending controls. For example, Robert Reich, the former US Labor Secretary, recalls his battles against budget cuts in his memoir of the first Clinton term. He could not see the virtues of reducing borrowing when there was a crying need for spending on the poor, on education, on public infrastructure. "Going into debt in order to help our people become better educated and more productive is entirely reasonable," he wrote in Locked in the Cabinet. "No sane business executive would fail to borrow money in order to make a profitable investment like this."

Mr Reich blamed Alan Greenspan, the Federal Reserve chairman, for persuading the President that a vote of confidence from the bond market, in the form of reduced long-term interest rates, would prove a reward that made it worth cutting spending on traditional Democrat programmes.

A famous remark from Mr Clinton's campaign director early in 1993, as the new administration got to grips with the economic realities after the inauguration, confirmed the Wall Street influence. James Carville said: "I used to think that if there was reincarnation I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Was Mr Greenspan right? The move from huge deficit into budget surplus in the space of five years is one of those rare real-life experiments that will test the economic theory. According to the theory that has become orthodoxy around the world, the elimination of the deficit will have two beneficial results. One is that long-term interest rates should stay low, keeping the cost of borrowing for companies, consumers and home-buyers low too. This should help keep investment and consumer spending strong.

The other is that the reduction in the amount of private savings the government has to absorb by selling Treasury bonds in order to finance the deficit will release those savings for more productive investment.

There is another element in this equation, in the amount by which American spending on imports exceeds American incomes. This gap - the balance of payments deficit - is big and growing. It is eating into US national saving, with foreign capital plugging the gap. But even so, a lower government budget deficit should help improve both domestic saving and investment.

The government's reduced need to sell Treasury bonds should also have a supplementary consequence. For some time there has been concern that the Asian financial crisis will reduce foreigners' appetite to buy US government securities, triggering a fall in the bond market which could in turn undermine share prices.

A combination of higher long-term rates and a fall on Wall Street undermining the value of the now very common stock option schemes used to pay managers and professionals could make a serious dent in US growth. But if the government is actually repaying some debts next year, the bond market looks much less vulnerable.

Some economists are predicting that this is exactly what will happen. The yield on the benchmark long bond is near 6 per cent. Optimistic forecasts predict it will fall towards 5 per cent over the next year - and would be even lower but for the fear of an upturn in inflation.

But the Old Democrats, like Old Labour, would argue that this is not enough to justify the failure to spend adequately on social priorities like education and welfare reform. Mr Reich said precisely this on a recent visit to London, criticising the Fed for being over-zealous. US interest rates could be even lower without any risk of triggering inflation, he argued.

This overlooks two things. One is the market response to any perceived laxness on the Fed's part. If Mr Greenspan took short-term interest rates, which he can control, too low, long-term rates, which he cannot control, would rise. These have a much bigger influence on the demand for credit and the economy's growth.

There is also a subtler argument in favour of the orthodoxy. The American economy is in many ways returning to a performance last seen in the mid- 1960s. Low inflation, low unemployment, rapid job creation, a government budget more or less in balance. Economists see the 1960s as a golden age to which the industrialised nations have been unable to return. The fiscal and financial solidity of the economy, and the prosperity this generated, was what allowed the US to launch the Great Society and civil rights programmes.

Implementing political and social ideals does not come cheap and is never uncontroversial. It certainly cannot be done when a big deficit is forcing the government to penny-pinch. Critics of Gordon Brown's Iron Chancellorship like to compare him to the stern Stafford Cripps, forever associated - somewhat unfairly - with austerity and tough measures. It is more revealing to compare the strategy with Bill Clinton's, which will leave his successor as President the platform from which he can launch a more idealistic politics. Mr Brown just hopes to speed up the process and get to the launching pad in time for a second Labour term of office.

Start your day with The Independent, sign up for daily news emails
Voices
Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
News
ebooksNow available in paperback
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Life and Style
tech
Voices
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum