January 11, 1998, New York Times

       Balancing Act: Not So Fast -- Here Comes the Budget Crunch


         President Clinton displayed his deft political touch last week, calling for the first balanced
          budget in three decades and in the process taking credit for solving a problem that has
          dogged Washington since the early years of the Reagan administration.

          How much credit he actually deserves is a matter of dispute. For while the green eye-shade
          crowd is effusive in praising the tax increases and spending trims that President Clinton
          engineered in 1993, the improved fiscal outlook is a product of a variety of factors ranging from
          the stock market boom to the lower prices of imports from deflation-wracked Asia.

          "Think of it as the reverse of Murphy's Law," suggests Rudolph Penner,
          a former director of the Congressional Budget Office who is now a
          senior fellow at the Urban Institute. "Everything that could go right has
          gone right."

          Paradoxically, the real test of fiscal leadership for Clinton and his
          successors may be how they manage the good times ahead. For while
          there are solid reasons to believe that the budget will remain in surplus
          for a decade or more, the retirement of the baby boomers is certain to
          push the budget deeply into the red soon thereafter unless Washington
          acts preemptively to curtail the future cost of Social Security and

          "The future still looks terrible, but the day of reckoning has been
          postponed by a decade or more," said Robert Reischauer, another
          former Budget Office director who is now at the Brookings Institution.

          A glimmer from the end of the deficit tunnel was first spotted in 1990,
          when President George Bush broke his campaign pledge and acceded
          to a tax increase. A second round of deficit cutting in 1993 also made a
          big difference, as has the Midas touch of the Federal Reserve in managing monetary policy.

          But the pace of deficit reduction, accelerated by the coincidence of stable growth, declining
          inflation, exceptionally low unemployment and off-the-charts tax receipts, caught virtually
          everyone by surprise.

          Last September, the Congressional Budget Office forecast a $34 billion deficit in 1997 that would
          rise to $57 billion in 1998 and return to balance only in 2002. Last week the Budget Office
          revised the 1997 deficit estimate down to just $22 billion and projected a $5 billion surplus for
          1998 -- a $62 billion swing in four months without any changes in federal spending or tax policy.

          "Forecasters have repeatedly had to play catch-up since the beginning of 1996," marveled Van
          Doorn Ooms, director of research at the Committee for Economic Development.

          Good news begats more good news. The quicker return to budget surplus means a smaller
          national debt down the road, along with lower interest rates and smaller annual interest payments
          to service the debt. It now appears that the "baseline budget" -- one that assumes no changes in
          fiscal policy -- will remain in surplus until 2012.

          At that point, the retirement of the first wave of aging baby boomers, who are entitled to
          generous Social Security and Medicare benefits, will darken the budget picture. But Reischauer
          points out that the ratio of federal debt to gross domestic product, arguably the most objective
          measure of the burden of the debt, will probably continue to fall, with debt declining from the
          current level of 48 percent of GDP to just 20 percent in 2015.

          And while the baseline-budget deficit will grow steadily after 2012, it is not expected to climb
          back to the 1992 magnitude (3.8 percent of GDP) until 2028.

          Slippage is possible -- make that, likely -- between now and then. Clinton has already proposed to
          invest a chunk of the prospective surplus in day care services, while House Speaker Newt
          Gingrich is appealing to conservative Republicans with calls for "at least a small tax cut every
          year" when the budget is in the black.

          By the same token, even a modest stumble from the straight and narrow path of low inflation and
          2 percent-plus economic growth would reduce projected revenues and ratchet up spending on the
          social safety net. Moreover, said H. Erich Heineman, an economic consultant in New York, "If
          there's a serious recession, you can forget about surpluses."

          But the deeper fear among economists is that budget bliss will persist well into the next decade,
          undermining the sense of urgency in rethinking how the nation will pay for the retirement of the
          baby boomers. For while the prognosis has brightened considerably since fiscal reformers first
          warned of the coming demographic tsunami, there is still big budget trouble ahead.

          In 1991, the economists Alan Auerbach, Jagadeesh Gokhale and Lawrence Kotlikoff estimated
          that Americans born after 1994 would have to fork over an astonishing 84 percent of their wages
          to deliver on the nation's promises to the old. A recalculation, expected to be published this year,
          is likely to reduce this anticipated tax burden to around 50 percent.

          But this would still be a remarkable stretch compared with the estimated 30 percent lifetime net
          tax rate -- taxes paid less government pensions and medical care received -- on Americans born
          in the 1930s and 1940s.

          Kotlikoff, an economist at Boston University, put it another way. To create an actuarial balance
          between future revenues and promised government benefits, he estimated that personal and
          corporate income tax rates would have to be raised by 20 percent right now and kept at the
          higher rates indefinitely.

          Waiting a decade or two to act, of course, would drastically increase the cost of the fix. "The
          idea that the problem is solving itself simply ignores fiscal reality," Kotlikoff argued.

          Penner is tentatively optimistic that policy makers will be able to deal rationally with distant but
          inevitable demographic change, even as they celebrate the current respite from deficit-driven
          politics of fiscal scarcity. "I'm very impressed with how the idea of Social Security and Medicare
          reform has entered mainstream debate," he said.

          But that is asking a lot from officials trained by voters to focus on the present, lest there be no
          future. "It will be several political lifetimes until Washington again faces a budget crisis,"
          Reischauer said.