President Clinton and now candidate Al Gore have made a case that fiscal responsibility, specifically the Budget Act of 1993, was their primary policy contribution to the long boom. This focus on the Budget Act of 1993, of course, serves a partisan purpose, because this act was the only major economic policy initiative by the Clinton administration that was not dependent on Republican support.
Their conjecture that the large increase in the top marginal tax rate in the 1993 act would increase economic growth, however, is not consistent with any known macroeconomic theory and leads them to misrepresent the historical record. The new Gore-Lieberman economic plan, for example, contends that "During the 1980's and early 1990's with the debt quadrupling, mortgage rates skyrocketed and many families were priced out of owning a home." In fact, average mortgage rates on new homes declined from 15.14 percent in 1982 to 8.24 percent in 1992.
Similarly, the new economic plan contends that "The 1993 commitment to deficit reduction changed market expectations and had an almost instant impact on interest rates. Daily stories in the Wall Street Journal, the New York Times and other papers attributed the sharp decline in long-term rates to the introduction and passage of the deficit reduction package." In fact, the average yield on 10 year Treasury securities increased from 5.68 percent in August 1993 (when the Budget Act was passed by the narrowest margin) to 7.96 percent in November 1994 (when Republicans were elected to a majority of Congress).
More important, numerous careful econometric studies of the longer record have failed to find any significant positive relation between U.S. interest rates and the federal budget deficit. The reason for this is less clear but probably related to the fact that new U.S. federal borrowing has been a very small share of the total world stock of debt instruments.
All of this would be only a tempest in some academic teapot except for the fact that the Gore-Lieberman case for reducing the explicit federal debt (running a continued budget surplus) is based largely on the alleged effects of such a fiscal policy on interest rates. Mr. Gore would make a sounder case by arguing that a budget surplus has better economic effects than most of the additional spending that the next president and Congress would otherwise be tempted to approve. But his unsupported arguments about the interest rate effects of this fiscal policy are not sufficient to dismiss the case for using the projected surplus as an opportunity to finance the privatization of Social Security or a thorough reform of the federal tax system.
Do your homework, Mr. Gore, or get better economic advisers.