WSJ editorial claimed that PAYGO did not contribute to declining deficits in '90s, but Greenspan seems to disagree
Research ››› ››› JOSH KALVEN
A Wall Street Journal editorial repeated the claim that the deficit-neutral "pay-as-you-go" (PAYGO) budget rules that House Democrats intend to reinstate did not contribute to the elimination of the budget deficits in the 1990s. But both former Federal Reserve chairman Alan Greenspan and former Congressional Budget Office (CBO) director Dan L. Crippen have pointed to PAYGO as instrumental in establishing the fiscal discipline that gradually decreased the deficit during the 1990s and ultimately led to large surpluses.
In a January 5 editorial, The Wall Street Journal repeated the claim that the deficit-neutral "pay-as-you-go" (PAYGO) budget rules that the House of Representatives voted to reinstate as had been promised by Democrats during their campaign did not contribute to the elimination of the budget deficits in the 1990s. The Journal editorial read: "Paygo enthusiasts ... claim that when these rules were in effect in the 1990s the budget deficit disappeared and by 2001 the budget recorded a $121 billion surplus. Sorry. The budget improvement in the late 1990s was a result of three events wholly unrelated to paygo." But both former Federal Reserve chairman Alan Greenspan and former Congressional Budget Office (CBO) director Dan L. Crippen have pointed to PAYGO as instrumental in establishing the fiscal discipline that gradually decreased the deficit during the 1990s and ultimately led to large surpluses.
Further, in citing "three events" that led to this "budget improvement," the Journal editorial left out the Omnibus Budget Reconciliation Act of 1993 (OBRA) -- passed by the Democratic Congress and approved by President Bill Clinton -- which, as noted by a Democratic congressman in 1998, the CBO cited as a major factor in the elimination of the deficits during the 1990s.
The PAYGO restrictions were established in the Budget Enforcement Act of 1990 (BEA), passed with Democrats in charge of Congress and President George H.W. Bush in the White House -- and extended in 1993 under a Democratic Congress and President Clinton and again in 1997 under a Republican-controlled Congress and Clinton. They required that all tax cuts and spending increases be offset by equivalent tax increases or spending cuts. Following the emergence of budget surpluses in the late 1990s, Congress increasingly circumvented the PAYGO limits, and in 2002 the Republican Congress allowed the PAYGO provisions to expire. The years since have been marked by massive deficits. In response, Democrats pledged to reinstate PAYGO if they gained control of Congress in the 2006 midterm elections, which they did. On January 5, the House of Representatives voted 280-152 to adopt a rules package that included PAYGO, with all Democrats voting in support except one -- Rep. Richard E. Neal, who did not vote -- 48 Republicans voting in support, and 152 Republicans voting against.
In response to the Democratic pledge to support PAYGO, the Journal's January 5 editorial (subscription required) -- headlined "Tax as You Go" -- criticized the policy and claimed that it did not contribute to the elimination of the budget deficits in the 1990s:
Congressional Democrats are dashing out of the gates to establish their fiscal conservative credentials. And as early as today House Speaker Nancy Pelosi will push through so-called "pay-as-you-go" budget rules for Congress. Keep an eye on your wallet.
Paygo enthusiasts also claim that when these rules were in effect in the 1990s the budget deficit disappeared and by 2001 the budget recorded a $121 billion surplus. Sorry. The budget improvement in the late 1990s was a result of three events wholly unrelated to paygo: the initial spending restraint under the Republican Congress in 1995 and 1996 as part of their pledge to balance the budget; a huge reduction in military spending, totaling nearly 2% of GDP, over the decade; and rapid economic growth, which always causes a bounce in revenues. Paygo didn't expire until 2002, but by the late-1990s politicians in both parties were already re-stoking the domestic spending fires.
While the three factors cited by the Journal certainly may have contributed to the declining deficit in the 1990s, the effect of PAYGO cannot be dismissed. Indeed, as Media Matters for America noted [anchor at "Spending"] in response to a similar June 22, 2006, Journal editorial (subscription required), then-Federal Reserve chairman Greenspan has cited PAYGO and the BEA budget rules in general as instrumental in establishing "a better fiscal policy" that ultimately led to "the brief emergence of surpluses in the late 1990s," as he stated during testimony before the Senate Banking Committee on April 21, 2005. Greenspan went on to assert that those surpluses led lawmakers to violate and ultimately abandon "the rules that helped constrain budgetary decisionmaking earlier in the 1990s -- in particular, the limits on discretionary spending and PAYGO requirements." He added that the reinstatement of such rules "would signal a renewed commitment to fiscal restraint and help restore fiscal discipline to the annual budgeting process." During later questioning by Sen. Debbie Stabenow (D-MI), Greenspan asserted that "one of the real problems we have had was allowing PAYGO to lapse in September 2002. ... Were we still under the PAYGO regime, which I thought worked very well, we would have fewer problems now."
During June 27, 2001, testimony before the House Budget Committee, then-CBO director Crippen similarly attributed the shrinking deficits during the 1990s to PAYGO and BEA. He described the BEA as "salutary," noting that it "promoted budget constraint that helped to produce the surpluses that have emerged since 1998." He then added, "However, those surpluses and other factors have also put increasing pressure on lawmakers to circumvent the discretionary spending caps and the PAYGO requirement, making them less effective recently."
Further, Clinton's approval of OBRA -- which, among other things, raised taxes on the wealthiest Americans -- is conspicuously absent from the "three events" that the Journal claimed resulted in the "budget improvement" during the 1990s. After the emergence of a budget surplus in fiscal year 1998, the CBO cited OBRA and other legislation passed by the 103rd Congress as a major contributing factor. From the "Additional Views" section added by Rep. David Obey (D-WI) to a July 1998 House Transportation Committee report:
So what are the precise reasons for this dramatic turnaround since President Bush left office with a $290 billion deficit? The CBO has issued data that answers this question objectively and decisively.
According to the CBO data, the remarkable fiscal turnabout has been due to three primary factors: An improved economy with six years of sustained growth; legislation passed by the 103rd Democratic Congress in 1993 and 1994; and a slower rise in the cost of medical care (e.g., Medicare/Medicaid) than projected.
Obey went on to note that OBRA represented the "centerpiece" of the "pro-growth" policies passed by the 103rd Congress:
Clearly the CBO numbers confirm that the major credit for creating the 1998 surplus must go to actions of the 103rd Democratic Congress, which not only produced real net savings of $141 billion, but created the conditions necessary to adopt pro-growth monetary policies that have been very successful. The centerpiece of this effort, the deficit reduction bill passed in 1993, was described as follows by Federal Reserve Chairman Greenspan: 'There's no question that the impact of bringing the deficit down [through the 1993 budget bill] set in place a series of events -- a virtuous cycle, if I may put it that way -- which has led us to where we are.' (In testimony before the House Budget Committee, March 4, 1998.)