Press Briefing by Secretary of the Treasury, Robert Rubin; Chair of the National Economic Council, Laura Tyson; Director of the Office of Management and Budget, Alice Rivlin; and White House Counsel, Abner Mikva
The Briefing Room
11:26 A.M. EST
SECRETARY RUBIN: Good morning. Welcome. This is the economic troika, and we are going to speak for a moment or two, if we may, about the balanced budget amendment, a subject about which each of us and all of us, collectively, feel very, very strongly.
This is an administration that has had a deep commitment to fiscal discipline. We began this administration, as you all know, with projections of a deficit that was at, roughly speaking, 4.9 percent of GDP. We have worked very, very hard. The President has made an enormous number of very difficult decisions. As a consequence, the deficit that we now face in the current year is roughly 2.7 percent of GDP.
We project the deficit by the year 2000 will be 2.1 percent of GDP, and we project a deficit, assuming that the President's budget is enacted, of 1.6 percent of GDP by the year 2005. Another way to look at it is that the numbers that we inherited projected a deficit for 1998 of about $400 billion; that deficit will be about $195 billion, or less than half of what had been projected.
Having said that, it is very much our judgment that the right way to deal with fiscal order is to make the very difficult judgments that have to be made each year in the context of the circumstances that then exist. It is also our judgment that the balanced budget amendment is a potentially dangerous way to deal with the question of fiscal discipline. And while it has a certain appeal in the sense that it forces -- in one sense, may be viewed as forces decisions to be made, it has offsetting effects, which in our judgment vastly outweigh whatever benefits may exist. And it is in sum, I think, horrendous economic policy.
If the balanced budget amendment, with an arbitrary date of 2002 were to go into effect, it means that we have to get from where we are to balance by the year 2002. That may turn out to have been an economically good thing to do, but it also may turn out to have been an economically horrendous thing to have done.
The problem is that you're creating an arbitrary date, and then you're forcing the cramming of all that macroeconomic effect into this arbitrary period. And what happens will depend on circumstances offsetting interest rate policy, and all sorts of other circumstances that are impossible to predict at this time.
In the face of all of the complexities of an economy and all of the things that can happen that can't be predicted, it seems to us to be very unsound to try to force, arbitrarily, a certain amount, or a very large amount, actually, of deficit reduction into a predetermined arbitrary period. It creates a very serious macroeconomic risk of slowdown, and possibly even of recession, depending on the circumstances. As I said before, the sensible way to go about achieving fiscal order is to make your judgments year by year in the context of the circumstances that exist.
Secondly, if you put a balanced budget amendment into effect, what you do is you eliminate the automatic stabilizers that have been so much a part of economic life in this country for so long, and have has such a powerful ameliorating effect when an economy slows down. And as you know, what happens now is, as you begin to have a slower economy or even a recession, the deficit starts to widen, and that widening deficit has an offsetting macroeconomic effect, and it prevents the slowdown from reaching the full potential you otherwise would have had.
If you go into a balanced budget amendment, you have two effects. Number one, you eliminate the beneficial effect the widening deficit would have, the macroeconomic beneficial effect, and in a sense, even worse, you force additional cuts on top of the ones that have already taken place, so you actually worsen the slowdown, or worsen the recession, or turn the recession into something that could be far worse than the recession that otherwise would have occurred.
Treasury has made a study, and that study indicates that if you take the peak unemployment that occurred during the last business cycle, which was 1992 -- 7.7 percent unemployment -- had we had a balanced budget amendment in effect, you would have had nearly nine percent unemployment instead of 7.7 percent unemployment, and there would have been another 1.5 million people unemployed.
To conclude my brief remarks, we believe enormously in fiscal discipline. The President has been enormously committed to fiscal discipline, and in our judgment, a balanced budget amendment is undesirable and probably horrendous economic policy.
We would also suggest that people who are still thinking about their votes think not only about the circumstances of today, but how they'll feel a year from now and two years from now, and further on down the road as the balanced budget amendment has the kinds of effects that we think it has the potential for having.
And with that, let me turn the podium over Alice Rivlin.
DIRECTOR RIVLIN: Thank you, Bob. Let's get one thing straight. This discussion is not about whether the budget should be balanced, on the average, it is about whether we should write into the Constitution that the budget should be balanced every year. No one can fault the Clinton administration for not being serious about deficit reduction; we believe the deficit is too high, that it must come down. We have brought it down a lot; we want to bring it down more.
But we do not believe that we should write a requirement for balance every year into the Constitution. The real problem with doing that is that it would make swings in the economy bigger. The federal deficit has acted as a cushion that dampen recessions, make them less wide, less bad for people.
When the economy slows down, two things happen. One is, there are more people who are eligible for unemployment insurance and food stamps and the kinds of things that help people when they're in trouble. So expenditures for those things go up. More important, when people earn less and they lose their jobs, they don't pay as much income tax, so the federal revenues go down.
With spending going up and revenues going down a lot, in the beginning of a recession what you find is a deficit widening -- automatically; it just happens. And automatically, it offsets the horrendous effects of that recession.
Now, what would happen if you had to counteract that effect? You would have to -- the Constitution would say you had to, unless you had a super majority to override it -- you would have to do one of two things: You would have to cut spending to correct that deficit, and people would have less income. People receive those government checks; whatever it is you're spending for, it's income to somebody, so they would get less, or you would have to raise taxes, which would mean people would have less income. So the recession gets worse. We would have bigger swings in the economy, a deeper recession.
Now, that's not just a theory, you can really see it. You can see it in what has happened to recessions over the last couple of decades.
This is a chart that I borrowed from Senator Sarbanes, who has been making this point eloquently on the Floor of the Congress. But if you look back in our history at the early part of this chart, the economy went up and down by huge swings. In the period, especially the period since World War II when the federal budget has been large, and these automatic stabilizers have been in effect, we've still had recessions, but we have had much smaller ones than we would otherwise have had.
If we pass a balanced budget amendment to the Constitution, we are saying we want to go back to those days when the economy had huge swings, and many more people were out of work in a recession than are out of work in modern recessions.
Now, you might say, does that really matter, do you really need the federal budget as a stabilizer? Haven't you got the Federal Reserve? Well, that's a pretty blunt instrument to use -- monetary policy works slowly, and Laura's going to elaborate on that point.
DR. TYSON: Well, I've made these arguments already in a Washington Post opinion piece I wrote, and also I want to note that the Council of Economic Advisors has sent a letter to the Democratic members of the Senate indicating our opposition to this as bad economic policy -- again, making the point that deficit reduction is sound economics, but a balanced budget amendment is not.
Now, to follow up on what Alice just said, there are some who say, well, look, if you force the automatic stabilizers to be automatic destabilizers -- because that's what a balanced budget amendment does, it doesn't just turn off the automatic stabilizers, it forces fiscal policy to be actively destabilizing, to do the wrong thing at the wrong moment in the business cycle.
If you do that, the business cycle won't go away; the business cycle is part of a market economy and there's nothing we can do about that except use our policy instruments to try to moderate the business cycle. If you turn off one policy instrument, or force it to be destabilizing, there's one left, and that's monetary policy. So, sole responsibility for moderating the ups and downs of the business cycle, which can be very severe in a market economy, would be left to the Federal Reserve.
Can they and would they do the job? First of all, monetary policy is, as everyone knows, as I always taught my economic students for years and years, has long and variable lags. It takes a long time for monetary policy changes through interest rate changes to affect macroeconomic activity. The lags mean that monetary policy cannot be automatically stabilizing. There's nothing automatic about it. You have to recognize the problem, you have to take action, the action has to take effect. The automatic stabilizers work as soon as an unemployed person shows up for an unemployment compensation check. That is automatic, and that is why they are stabilizing. That's the first point.
The second point is, besides the presence of lags and lack of automaticity, there are limits on the scope of what the Federal Reserve can do. After all, short-term rates can only go as low as zero and probably not as low as zero.
If you look at the 1990 to 1991 recession, if you look at the period of time from 1990 to the spring of 1992, the Federal Reserve reduced short-term interest rates a total, a cumulative total of 5.25 percentage points. That's a lot of reduction, particularly if you're starting out at a level of around 6 percent. Now, that reduction did not prevent the economy from going into a recession, and furthermore, it was working in tandem with the automatic stabilizers. And what the Treasury study shows is if you had turned off those stabilizers, you would have had, even with all that effort by the Federal Reserve, a pretty deep recession.
The last thing is that if the Fed is put into the situation of having to moderate the cyclical ups and downs of the economy, in fact, what will happen is that interest rates themselves will become more volatile. If you're going to try to moderate the output of employment side of the economy, one can predict that interest rates will move up and down in a more volatile way; and of course, the interest-sensitive sectors of the economy, like housing, will be in a much more cyclically unnerving world. They will, in a sense, go up and down even more.
Finally, let me just point out that this would essentially put great political pressure on the Federal Reserve. I always talk about the importance of the independence of the Fed. I think it is important to protect the independence of the Federal Reserve. The independence of the Federal Reserve is protected by having an independent fiscal authority, so that, essentially, not all of the pressure for moderating the business cycle falls on one actor.
And then let me finally say that the Fed has traditionally taken, as its main policy objective, inflation, not output and not employment. They're all there, but traditionally, inflation has been its priority. There are those in the Congress who are for a balanced budget amendment and would like to, by law, legislate that the only activity of the Fed be to control price stability. In that world, we'd have neither monetary policy nor fiscal policy as a stabilizer; we'd have nothing as a stabilizer.
To sum up, the automatic stabilizers, fiscal side, have done very well, you can see very clearly in this chart or in the Treasury study, at moderating the business cycle. People who are voting for a balanced budget amendment should project themselves back in history and think about Herbert Hoover. He was well intentioned; he wanted to have a balanced budget; and all of the studies suggest that his attempts to have a balanced budget made the Depression considerably worse. We should not go back and undo a set of policies that work well. Thank you.
And now we're going to hear from another point of view, from the legal side in terms of what this would do to the justice system from Ab Mikva.
MR. MIKVA: Let me say that even though I attended and graduated from the University of Chicago, I want to make it perfectly clear that I am not an economist. But I did spend 15 years as a judge, and I think I do know something about disputes that come before the courts. And the Constitution that this so-called balanced budget amendment proposes to amend is not a self-effectuating document -- it's enforced; it's enforced by judges -- who resolve disputes that come before them. And the amendment would inevitably throw the courts into an area that our founders wisely kept us out of when they gave us this marvelous little document 200 years ago.
These are political questions -- hard political questions -- that the Congress and the President have to resolve. How to allocate our resources, what should come first, what should be cut, how to get to a balanced budget. As a former member of Congress, I can testify how hard it is to try to balance a budget.
But the last place in the world you want to put those disputes is in the courts of the United States. And this isn't just my view; a wide array of constitutional scholars, ranging all the way from Robert Bork, former Judge Bork, to Lawrence Tribe, professor at Harvard, from Charles Fried, professor at Harvard, former Solicitor General to Geoffrey Stone, Dean of the University of Chicago Law School. All agreed and all urged the Senate not to pass this constitutional amendment, and I would sum up in one line: They said it would inappropriately involve the judiciary in the intractable questions of fiscal and budgetary policy, it would -- this is not something that judges, federal or state, are qualified to do.
SECRETARY RUBIN: Could I just add two more points -- each one sentence, and then we'll take questions. One, as we have said at the very beginning or throughout this discussion, what we have thought is that before anybody votes on a balanced budget amendment, they ought to look at the specifics as to what it would take. There's a reason for saying that, because when you look at the specifics, what you find is, is you're going to have to reduce an awful lot of programs that we think of as public investment and that are preparing this country for the future. Whether one wants to do that or not is a legitimate debate, but it seems that it certainly is the kind of exercise that one should go at in a very specific way before you vote, and at least in the judgment of many of us, a balanced budget amendment would force cutting programs that are immensely important in terms of preparing this country for the 21st century.
Secondly, it does change the congressional system with respect to how economic judgments are going to be made. That is to say, they will now be subject to a 60 percent vote if you're going to get an exception to the mandate of the balanced budget amendment, so in effect, 40 percent of the members of either House can hold your economic policy hostage.
DR. TYSON: To field the questions, okay, back there.
Q: A question, actually, for Secretary Rubin. The markets had a good day yesterday; they were very excited; they got over 4,000. I gather you don't much like this amendment. But some of -- (laughter) --
SECRETARY RUBIN: That is a perceptive observation.
Q: Some of the markets, though, take it as a sign of the general fiscal will to further cut the government. What do you think the market impact would be?
SECRETARY RUBIN: I don't -- you ask me, do I think that the balanced budget amendment has any effect on the market going up as opposed --
Q: If it fails, what do you think the impact might be? Do you think they would take it as a sign that Washington is losing its --
SECRETARY RUBIN: I'll tell you what I think. I think if people think long-term, it's going to make them much more troubled about the prospects for our economy. And since I think that markets ultimately reflect fundamentals, it seems to me that this is -- if I believe it to be bad for the economy, which I do, then it seems to me that it also follows to be bad for markets, at least over time. How markets will react in the short term to anything is, I would say, in the realm of the unpredictable.
Q: The comment that cutting programs that are immensely important to the future of the country under the balanced budget amendment, but in fact, even without the amendment, if the budget is to be cut, you're not going to get tax increases, even though the Republican budget isn't out yet. You know what Kasich has urged in the past, you know the Solomon budget -- 90 percent downsizing of departments, cutting out the Sea Wolf, means testing everything. Bad as that may seem to you, why is that worse than another trillion dollars on the deficit?
DIRECTOR RIVLIN: We're not talking about whether, as I said at the beginning, we're not talking here about whether we should reduce the deficit. We all agree that we should, and that it is going to take spending cuts. To do that, we have proposed some. There are others being discussed on the Hill. We will come to a meeting of the minds about how to reduce federal spending over time.
What we're talking about here is if you had to balance the budget every year and you were going into a recession, then you would have -- be forced to do cuts simply to balance the budget in this perverse way that were deleterious to whatever the objectives at that time were. You would be forced to do them, and quickly. And to jeopardize the longer-run purposes for which that spending was being -- had been voted in the first place in order to satisfy this perverse requirement.
DR. TYSON: I think we have time for just about one more -- two more, okay.
Q: Have you considered any kind of alternative proposal to make on the Hill short of a constitutional amendment, that would lay out a five or 10 or 20-year budget cutting schedule that one could use for some political cover for voting against the --
SECRETARY RUBIN: David, we submitted a budget which brings the deficit down to 1.6 percent by the year 2005, and what we have said in addition is if you want to get at the real problem -- as you well know, the real problem of the deficit, what you need to do is deal with what's driving the deficit, and those are the federal health care entitlements. And our suggestion has been those be dealt with in the context of comprehensive and broadbased health care reform. That, in our judgment, is a sensible approach to fiscal order.
Q: What I was asking, though, was something of more specificity than the 2005 --
SECRETARY RUBIN: But any date you put, whether it 2002, 2005, whatever, it's an arbitrary date. And back to -- (inaudible) -- point, what it does is it forces you to make a certain number of cuts no matter what you think about the balance between the cuts and the benefits of the programs. In our judgment, that's not a sensible way to make economic policy.
MS. TERZANO: We'll take one more question.
Q: Why has President Clinton seemed so ambivalent about this budget since the election? And are there any plans to have him speak out forcefully?
DIRECTOR RIVLIN: I don't think he's ambivalent at all. He made clear in the State of the Union that he was against this. He has been making calls on the Hill to senators expressing his views very forthrightly. And he's sent Laura and me and others up more times than I would like to calculate to testify on the Hill, making very clear the administration's position on this amendment.
Q: Are you changing any minds?
DR. TYSON: Well, we believe that the forcefulness of our arguments can hardly be overlooked. (Laughter.) So we anticipate that this will have an effect. We really do feel extremely strongly and in a unified way that this is bad economic policy. We've felt that all along. The President feels that. He's been making the case. We're making the case. We're very close to a vote here. We're very close to doing something which will have, I think, undermining effects on the Constitution and undermining effects on the economy. So I think it's the right moment to make the case as clearly as we possibly can. Let's talk about moving towards more deficit reduction. Let us not talk about removing one of the great innovations of modern economics, which is the use of fiscal policy to stabilize the business cycle.
THE PRESS: Thank you.
END11:48 A.M. EST
William J. Clinton, Press Briefing by Secretary of the Treasury, Robert Rubin; Chair of the National Economic Council, Laura Tyson; Director of the Office of Management and Budget, Alice Rivlin; and White House Counsel, Abner Mikva Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/270210