The galloping economy has played a major role in reducing the deficit by sweeping record levels of tax revenue into the treasury over the past two years. This year, federal revenues are running about $110 billion above those of 1996. Here again Republicans can deservedly claim partial credit — but mainly for what they have not done, rather than what they have done. They have not crippled the economy with costly new mandates or regulations (although the forthcoming EPA clean air mandates may be a severe body blow). They have not enacted expensive entitlement expansions (with the glaring exception of this year’s child health care programs). They have not raised taxes. The animal spirits guiding this economic expansion appear contented enough with a Congress that is at a bare minimum committed to doing no harm.
The historical irony is that the person most responsible for deficit reduction gets very little attention in the national media. The president who deserves the most credit for the fast‐approaching balanced budget we are now witnessing is not Bill Clinton. And the Republican who deserves the most credit is not Newt Gingrich. Rather, the politician whose long‐run policies are most responsible for leading us to a potential balanced budget next year is Ronald Reagan. Yes, Reagan, the man vilified by Clinton for “tripling the national debt in the 1980s.”
Reagan’s legacy affects us dramatically today in two ways. First, Reagan’s anti‐Communist foreign policy and his military buildup hastened the disintegration of the Soviet Union. In the past eight years, America’s victory in the Cold War generated a half‐trillion‐dollar peace dividend. That peace dividend grows every year, and it fell like manna from heaven into President Clinton’s lap. The budget deficit is falling, not primarily because Clinton raised taxes and not primarily because the congressional Republicans committed themselves to a balanced budget, but because the defense budget is nearly $100 billion lower today than when the Berlin Wall came down.
The second effect of the Reagan years was to launch America into what is now widely regarded as a remarkable 15‐year low‐inflation, high‐employment bull market (the Dow was at 800 in 1982, 8,000 today)–interrupted only mildly in the middle Bush years. These 15 years of prosperity were propelled by Reaganomics: lower tax rates, a long‐run decline in inflation and interest rates (which also lowers tax rates), freer international trade and a strong dollar. Even with the anti‐supply‐side Bush and Clinton tax hikes, the top tax rate today of 40% is far below the towering 70% tax rate that disabled the economy in the 1970s. The end of the Cold War has created an international environment of peace and stability, nudging the economy into still higher gear in recent years.
Bill Clinton and Newt Gingrich can compete for the Washington spotlight over the good news of dramatic deficit reduction. Their policies have not contributed much to this riveting high‐technology age of economic expansion and corresponding fiscal improvement—but, by the same token, their policies haven’t impeded it either. Meanwhile, the politician whose policies are most responsible for cultivating this era of growth lives 3,000 miles beyond the Washington Beltway.