Friday, March 19, 2010

An Interview with Rick May: On the Front Lines of the Balanced Budget Battle - Part 5

Recently I reached out to Rick May, the Staff Director of the U.S. House Budget Committee from 1993-1997, to ask him about his experience with then Chairman John Kasich as they worked to formulate a balanced budget.

His first-hand accounts are a fantastic read and it's my pleasure to share with you the final installment of the interview.

Thanks a lot to Rick for taking the time to respond to my questions.

Part 1.
Part 2.
Part 3.
Part 4.

And now, part 5...

3BP: What did the Balanced Budget agreement mean to the economic prosperity of United States?

I think the serious effort House Republicans started in 1995 and then finished in 1997 to balance the budget made a significant contribution to the good economic times of the late 1990s. In fact, the House Budget Committee used to have a chart that showed how the Dow's Industrial average started going up exactly at the same time Republicans gained the House majority in November 1994 for the first time in 40 years. The commitment to bring fiscal sanity to Washington was the #1 priority of that new Republican majority and I believe the financial markets understood that and they reacted with a much stronger sense that the future will be brighter.

In addition, many people tend to forget that the Balanced Budget Act not only contained spending reductions in federal entitlement and other government programs, it also contained numerous tax cuts that provided more money in families' bank accounts and incentives for businesses to grow and expand. For example, the Balanced Budget Act contained a reduction in the capital gains tax rate and this lowering of taxation on capital formation did lead to more investment and job creation --- I think it is fair to speculate that maybe the boom in that period was assisted by the lower capital gain rate and several other tax provisions in the Act and these tax reductions made the boom possible in the first place. There were also tax cuts for families with children and these tax cuts had to provide even more resources for savings and/or consumption that led to more economic growth.

While the Balanced Budget was the first piece of legislation to enact a balanced federal budget sine the mid-1960s, it also was a rare legislative achievement where both tax cuts and spending reductions (or more accurately reductions in the rate of growth) were included in the same bill. The tax cuts actually increased the political will power of decisionmakers to enact spending reductions because the Balanced Budget Act had both tough choices, but economic "goodies" as well. Maybe this lesson or approach (which was first done in John's federal budget alternative issued in 1994) should be followed by the current Administration as the nation sinks into debt by trillions of dollars.

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