The Global Crisis: Clinton's `solid footing' leaves a lot to be desired

"Just about the only people on the planet still buying like mad are Americans, and they cannot keep it up much longer."

THE BUDGET of the United States government will run an estimated surplus totalling $4.5 trillion (pounds 2.8 trillion) over the next 15 years. Such long-range estimates are suspect, of course. One cannot possibly predict government revenues and expenditures that far ahead. The important point, though, is not the exactitude of the estimate, but the remarkable fact that, according to virtually all forecasts, the United States is running a very large budget surplus, and is expected to continue to do so.

This is an extraordinary turnaround. Yet budget surpluses on their own are neither good nor bad. The question is how the government uses the surpluses. In his recent State of the Union Address, Bill Clinton gave a worrisome answer.

First, some background. In the early 1980s, after Ronald Reagan cut taxes and boosted spending on defence, his budget director, David Stockman, predicted budget deficits in the range of $200 billion a year, "as far as the eye can see". Stockman's forecast was correct. For the next 12 years, deficits mounted, and the US government's debt steadily grew. When Clinton was elected president in November 1992, before he officially took the reins, he asked me to oversee the initial work of preparing his first budget. We discovered that the deficit for 1993 alone was likely to be $300 billion, or more.

Besides Monica Lewinsky and a congressional impeachment, Clinton is likely to be best remembered for being the president who restored fiscal discipline to the United States government. His first budget reduced public spending and increased taxes, and thus set the country on the course of deficit reduction. The initial goal was modest: reduce the deficit as a proportion of the national product, from almost 5 per cent to about 2.5 per cent. But the goal became more ambitious, as the American public began to equate fiscal prudence with the nation's economic vigour. If cutting the deficit by half was good policy, eliminating it entirely would appear to be even better policy. To extend the logic one step further, if balancing the budget was a worthy objective, then, presumably, accumulating budget surpluses would be worthier still.

In his recent State of the Union message to Congress, Clinton proposed just this. Defying the wishes of Republicans to give the surpluses back to Americans in the form of a tax cut, and the wishes of many Democrats to spend the surpluses on such things as healthcare for the growing number of Americans who have none, the President insisted that most of the surpluses be saved. That way, he said, the government will have enough money to pay the public pensions that are due when the postwar "baby-boom" generation retires, more than three decades from now.

Saving the surpluses is the most fiscally conservative course by far. Its practical effect will be to reduce the national debt in the next few years - from about 45 per cent of national product to about 15 per cent. This will be the lowest level of national debt since before the First World War.

Many economists have applauded the President's fiscal prudence. Alan Greenspan, the Chairman of the Federal Reserve Board, is strongly supportive. Saving the surpluses and reducing the national debt will free money for the private sector. Businesses and individuals will be able to spend more and invest more, without risking inflation. The American economy will be on "a more solid footing", to quote the phrase that has been used repeatedly in praise of the President's plan.

But suppose your biggest worry isn't inflation, and the corresponding concern that public borrowing may "crowd out" private investing. Suppose, like me, your biggest worry is the very real possibility of worldwide deflation. You see that the global economy is rapidly approaching overcapacity. There isn't nearly enough purchasing power to consume everything the United States and the rest of the world are capable of producing.

Some 40 per cent of the global economy is already in recession. Japan remains flat on its back. Don't count on Southeast Asia to buy much from the rest of the world. Germany and France, still suffering double-digit unemployment, are slowing down. The Brazilian economy is teetering. Just about the only people on the planet who are still buying like mad are American consumers, and they cannot keep it up much longer. They are going into debt. So where will the demand come from? Businesses will not invest if they have too much capacity. The only remaining purchaser - the buyer of last resort, as John Maynard Keynes demonstrated 60 years ago - is the government.

And yet, it is precisely now that public budgets are being slashed all over the world. The price of admission to join Europe's euro has been to get deficits down to under 3 per cent of national product. The International Monetary Fund is demanding budget austerity as the price every Third World nation must pay for obtaining a loan.

We have become so accustomed to thinking of inflation as our biggest challenge that we have stopped thinking about the dangers of deflation. That's because most people alive today remember the double-digit inflation of the 1970s, but not the Great Depression of the 1930s. Large public deficits are presumed to be bad; public debt is presumed to be undesirable. Fiscal prudence (cutting deficits, balancing budgets, and, ultimately, saving surpluses) is presumed to be the best means of assuring prosperity, under all circumstances.

Lord Keynes isn't with us any more. But if he looked at today's global economy and heard Bill Clinton's latest proposal, he might be stirring in his grave.

Robert B Reich, the former US labor secretary, is university professor of social and economic policy at Brandeis University