Supply Side Not ‘Voodoo’ After All

It’s official. Fiscal year 1998 is over. For the first time in 30 years, Congress has balanced the budget. Actually, we have a $60-billion surplus. Next year the budget will be balanced even after excluding the Social Security fund surplus. This is a remarkable achievement for the country. A balanced federal budget is a monumental event, like the Berlin Wall coming down or a man hitting 70 home runs in one season.

The last time the budget was balanced, “Butch Cassidy and the Sundance Kid” was on the silver screen, the Vietnam War was at its height, “Bonanza” was a hit TV show, God performed his last miracle with the New York Mets and Lyndon Johnson was still in the White House.

Over the course of the next six presidencies, more than $4 trillion of debt was accumulated. Washington’s destructive addiction to red ink became a symbol, both here and abroad, of a nation in decline, bent on spending itself into financial oblivion. To the American public, balancing the federal budget became a kind of moral crusade--the domestic equivalent to winning the Cold War.

How did it actually happen? Many in the media have falsely assigned the credit to the 1990 and 1993 budget deals--especially the big tax increases. Yet even after both of those tax increases were enacted, we were still facing $200-billion deficits for as the eye could see.

The Clinton administration’s contributions to deficit reduction have been exaggerated. After all, it was Bill Clinton who, when Republicans proposed their own balanced budget, waged a shameless Mediscare campaign to torpedo the plan. It was Clinton who, during the big budget fight in 1995, had to submit not one, not two, but five budgets until he begrudgingly matched the GOP’s balanced budget plan.

And it was Clinton and his wife who tried to engineer a federal takeover of the health care system--a plan that would have sent the government’s finances into the stratosphere. For this president to take credit for the balanced budget would be like Al Capone taking credit for ending Prohibition.

The Republicans in Congress have not received proper credit. Today’s surplus is a byproduct of the GOP’s single-minded crusade to end deficit spending. Arguably, Newt Gingrich’s finest hour as Speaker of the House came in March 1995, when he rallied Republicans and moderate Democrats behind the idea of eliminating the deficit within seven years.

At the time the idea seemed outlandish. Skeptics said they would never do it. Guess what? They did it in four years. In fact, since Republicans took over Congress, the cumulative budget deficit from 1995 through 1998 has been chopped by $650 billion.

It would be natural to assume that this deficit reduction progress is a result of the Republican budget knife. Alas, the budget hasn’t been sliced or diced much at all. At $1.7 trillion, the government remains bigger than ever. Over the past 10 years, domestic outlays have grown by $300 billion after inflation, a one-third increase.

So then how did we balance the budget? It turns out that Ronald Reagan and Jack Kemp were right all along. We grew our way out of the deficit. In the 1980s, that supply-side notion was universally ridiculed as “voodoo.” But it finally worked. The rampaging economy over the past 16 years finally galloped past the growth of the budget. Since 1982, federal tax receipts have grown at a 7% annual rate. Revenues caught up with spending, and the two lines finally crossed paths.

There was one other major factor, too often ignored, that made all of this possible: America won the Cold War. Since then, we’ve saved a cumulative $1 trillion on Pentagon spending. This massive peace dividend has contributed to a slowdown in the growth of the overall federal budget.

So there you have it: A federal budget finally balanced due to a smaller military budget and a vibrant American economy that is producing a torrent of tax revenue for Uncle Sam.

Peace and prosperity balanced the budget. Time to celebrate. And to thank Reagan.