Spiral of prosperity grips capital

Somewhere, David Stockman may be smiling.

The mop-haired Mr. Stockman was Ronald Reagan's first top budget official. He entered office full of budget-cutting zeal.

He left disillusioned, after admitting to a reporter that there was probably no way he was going to bring the federal budget under control. But today, Stockman's vision appears to be reality. A flood of black ink has returned Washington to the politics of prosperity that dominated much of the booming post-World War II era.

During the 1980s and most of the 1990s, red ink precluded many political choices. The federal government seemed locked in a downward deficit spiral that just seemed to get worse and worse, no matter what the nation's lawmakers did.

Now some tough choices made in past years are paying off. Combined with the booming economy, they have created a self-reinforcing upward spiral that is producing surpluses - and fiscal options - few experts thought they would see again this century.

Will President Clinton agree to Republican tax cuts? Will the GOP-led Congress accept White House Medicare proposals? Will Washington strike a millennium-ending budget deal that gives each side something it wants?

"Have we reached a plateau where we can make more rational decisions? Yes," says Mickey Edwards, a former GOP lawmaker from Oklahoma who is now a public policy expert at the John F. Kennedy School of Government in Cambridge, Mass.

Few in Washington may remember Stockman today. He was director of the Office of Management and Budget when a mere stripling by Washington standards. He assumed his post with revolutionary zeal, sure he could cut government spending and bring the budget under control.

But the numbers, and the politics, were against him. He left, disillusioned, after admitting to a reporter from The Atlantic Monthly that there was probably no way he was going to bring the flood of red ink under control.

Fast forward to 1999. Clinton stands in the Rose Garden and holds up a chart that shows, not just that the federal budget is balanced, but that projected surpluses could eliminate the government's outside debt by 2015.

Much can happen between now and 2015, and it is very unlikely that Clinton's fiscal predictions will be completely accurate. Still, the fact that he could hold such a ceremony is remarkable. How was he able to fulfill Stockman's dream?

"It's quite extraordinary the way the revenue situation has changed over the last few years," says Van Doorn Ooms, director of research for the Committee on Economic Development in Washington and a top congressional budget official in the 1980s.

Some tough political decisions helped erase the specter of $300 billion annual deficits marching off to the horizon. President Bush agreed to raise taxes in 1990, for instance - something that did not help him with his GOP base in the 1992 election.

Clinton rammed a deficit-closing package through Congress in 1993, an act that may have contributed to the Democrats' loss of the House and Senate in 1994. Even a quixotic presidential bid may have played a part. "If there's at least one benefit from Ross Perot's candidacy, it's that he raised awareness about budget deficits," says David Findlay, an economist at Colby College in Maine.

Then there's the long summer of the late '90s economy. It has featured not just strong growth, but strong growth with low inflation - meaning the growth in tax receipts outstrips the growth in spending on Social Security and other big programs linked to the Consumer Price Index.

A touch of magic is helping, too. Government revenue is higher than even the strong economy can account for, points out Mr. Ooms. It's likely the stock boom has produced a stream of capital-gains taxes that economic models do not account for. No one really knows for sure.

"So even though you're relatively conservative about what you assume [will happen in the economy], as long as you have the virtuous spiral continue, it tends to accelerate due to the nature of compound interest," says Ooms.

For much of the last two decades, Washington has had little fiscal flexibility. Reagan cut taxes and boosted defense spending early in his time in office. After that, the GOP's basic desire to cut taxes and Democratic spending priorities could be satisfied only with small steps, as the overriding priority was to not bankrupt the country.

With more money comes more flexibility. Potential flexibility, anyway - tight spending caps put in place back when deficits still loomed are restraining this year's appropriations process. Even many Republicans are chafing at the cuts they may have to make, in the midst of plenty, to keep from circumventing these restrictions.

Mr. Edwards, for one, thinks Congress should freeze spending at last year's levels. That would be easier than reducing programs under the caps, while still maintaining some fiscal discipline.

Others are talking about a grand bargain. The GOP would get the big tax cut it wants, while the White House could get its new Medicare program, and other spending priorities. Such a deal would be a return to the more free-flowing politics of the 1960s, when prosperity meant that political conflict could be solved more easily by giving everyone a piece of what they wanted.

Ironically, the fact that it is now possible to strike such a bargain may mean that Congress and the White House won't want to accept any of the other's fiscal proposals. "With a surplus, it simply is no longer as important as it used to be for there to be a budget deal each year," writes Stan Collender, a budget expert with Fleishman-Hillard in Washington.

That's because inaction no longer risks the nation's fiscal future. In this environment, other political factors - such as the GOP's basic mistrust of Clinton - assume greater importance.