Jonathan Chait

The Balanced Budget Scam

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The 1997 Balanced Budget Act is one of the great propaganda coups in the history of American governance. It is remembered today fondly by right and left as the hallmark of a bygone era of bipartisan cooperation, when the two parties came together in the spirit of shared sacrifice in order to secure a balanced budget. Here's Matthew Yglesias noting how the law "managed to raise revenue." Here are conservatives like Keith Hennessey and Paul Ryan holding it up as a case of the government cutting taxes and balancing the budget.

What really happened in 1997? What happened is that deficits had been rapidly disappearing, as a result both of fast growth and of 1990 and 1993 laws that raised taxes and cut spending. By 1997, it was apparent the budget would be balanced the following year. Both President Clinton and Congress recognized an opportunity to take credit for this development by passing a law called the "Balanced Budget Act."

The resulting agreement cut payments to Medicare providers, and divvied up the proceeds between a new childrens' health insurance program (for Democrats) and a capital gains tax cut (for Republicans.) It also imposed budget caps, which means a generalized promise to reduce domestic spending programs without specifying where the cuts will occur and which, naturally, was ignored.

The resulting agreement did not hasten or in any way contribute to the balancing of the budget. Michael Linden explains:

The Balanced Budget Act of 1997 actually increased the deficit for 1998. Indeed the CBO reported that the passage of that bill resulted in a $21 billion deficit increase, which more than offsets any fiscal improvement stemming from the previous year’s legislation. The combined legislative changes passed during the first three years of Speaker Gingrich’s tenure added $5 billion the deficit in 1998.

This was not Clinton's finest moment. The purpose was to engage in some horse trading that amounted to the opposite of fiscal responsibility -- your rich guys get their taxes cut, our sick kids get medical care -- while posing as creators of the balanced budget. Even as a raw political maneuver, I consider it a long-term strategic blunder by Clinton. He had been in position to claim a lions' share of the credit for the balanced budget, as the one legislative change during his term that significantly reduced the deficit was his 1993 budget, which Republicans unanimously and hysterically opposed. (George H.W. Bush's 1990 budget did even more to reduce the deficit, and this, too, was fiercely opposed by the right for its mild tax hikes on the rich.) Instead, Clinton created a mythology that allowed Republicans to split credit for balancing the budget.

In any case, over the long run, all substantive analysis of the "1997 Balanced Budget Act" has been subsumed by the raw propagandistic power of the name "1997 Balanced Budget Act." I suppose the lesson is that if both parties decide to strike a bargain, then people will remember the law for doing whatever it is they claim it accomplished, regardless of the reality.

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