Deficit Shackles: Will January, 2009 Repeat January 1993?

Both presidential candidates have been criticized for failing to name any promises or plans they’re going to have to scrap because of the bailout and the failing economy. That criticism is unwarranted. The assumption that we are about to have a rerun of 1993 — when Bill Clinton, newly installed as president, was forced to jettison much of his agenda because of a surging budget deficit — may well be mistaken.

At first glance, January 2009 is starting to look a lot like January 1993. Then, the federal deficit was running at roughly $300 billion a year, or about 5 percent of gross domestic product, way too high for comfort. By contrast, the deficit for the 2009 fiscal year is now projected to be $482 billion, or about 3.3 percent of gross domestic product. That’s not too worrying. But if the Treasury shovels out the full $700 billion of bailout money next year, the deficit could balloon to more than 6 percent of gross domestic product, the highest it’s been since 1983. And if the nation plunges into a deeper recession next year, with tax revenues dropping and overall domestic product shrinking, the deficit will be even larger as a proportion of the economy.

Yet all is not what it seems. First, the $700 billion bailout is less like an additional government expense than a temporary loan or investment. The Treasury will take on Wall Street’s bad debts — mostly mortgage-backed securities for which there’s no market right now because of the slump in housing prices — and will raise the $700 billion by issuing additional government debt, much of it to global lenders and foreign governments. As America’s housing stock regains value, as we all hope it will, bad debts become better debts, and the Treasury may well be able to resell the securities for at least as much as it paid, if not for a profit. And if there is a shortfall, the bailout bill allows the president to impose a fee on Wall Street to make up the difference.

Another difference is that in 1993, the nation was emerging from a recession. Although jobs were slow to return, factory orders were up, companies were expanding, and the economy was growing. This meant growing demand for private capital. Under these circumstances, the deficit Bill Clinton inherited, combined with his own agenda, threatened to overheat the economy, causing inflation. He had no choice but to trim the deficit and abandon many of his plans, a point that the Federal Reserve chairman, Alan Greenspan, was not reluctant to emphasize. Unless President Clinton did so, interest rates would rise and the economic recovery would be anemic.

Next year, however, is likely to be quite different. All economic indicators are now pointing toward a deepening recession. Unemployment is already high, and the trend is not encouraging. Factory orders are down. Worried about their jobs and rising costs of fuel, food and health insurance, middle-class Americans are unable or unwilling to spend on much other than necessities.

Under these circumstances, deficit spending is not unwelcome. Indeed, as spender of last resort, the government will probably have to run deficits to keep the economy going anywhere near capacity, a lesson the nation learned on a large scale when mobilization for World War II finally lifted us out of the Great Depression.

Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future productivity are not the same as deficits that maintain the current standard of living.

Here again, there’s marked difference between 1993 and 2009. Then, some of our highways, bridges, ports, levees and public transit systems needed repair. Today, they are crumbling. In 1993, some of our school children were crowded into classrooms too large to learn in, and some districts were shutting preschool and after-school programs. Today, such inadequacies are endemic. In 1993, some 35 million Americans had no health insurance and millions more were barely able to afford the insurance they had. Today, some 50 million are without insurance, and a large swath of the middle class is barely holding on. In 1993, climate change was a problem. Now, it’s an emergency.

Moreover, without adequate public investment, the vast majority of Americans will be condemned to a lower standard of living for themselves and their children. The top 1 percent now takes home about 20 percent of total national income. s As recently as 1980, it took home 8 percent. Although the economy has grown considerably since 1980the middle class’s share has shrunk. That’s a problem not just because it strikes so many as being unfair, but also because it’s starting to limit the capacity of most Americans to buy the goods and services the nation produces without going perilously deep into debt. The last time the top 1 percent took home 20 percent of national income, not incidentally, was 1928.

Perhaps it should not be surprising, then, that the Wall Street bailout has generated so much anger among middle-class Americans. Let’s not compound the problem by needlessly letting the bailout prevent the government from spending what it must to lift the prospects of Main Street.