to 3 percent over the next years, not enough to lower unemployment much or to ensure a sustained recovery. Then we got down to the meat of the coconut, as Alan Blinder, another of my economic advisors, was asked to analyze whether a strong deficit-reduction package would spur growth and new jobs by bringing down interest rates, since the government wouldn’t provide as much competition with the private sector in borrowing money. Blinder said that would happen, but that the positive effects would be offset for a couple of years by the negative economic impact of less government spending or higher taxes, unless the Federal Reserve and the bond market responded to our plan by lowering interest rates substantially. Blinder thought that after so many false promises on deficit reduction over the last few years, a strong positive response by the bond market was unlikely. Larry Summers disagreed, saying that a good plan would convince the market to lower rates because there was no threat of inflation as the economy recovered. He cited the experience of some Asian countries to support his view. This was the first of many exchanges we would have about the power over the lives of ordinary Americans exercised by thirty-year-old bond traders. Often my loud complaints about this, and Bob Rubin’s retorts to them, were funny, but the issue was dead serious. With national unemployment stuck at above 7 percent, we had to do something. Tyson and Blinder seemed to be saying that, for the longterm health of the economy, we had to cut the deficit, but that doing so would slow down growth in the short term. Bentsen, Altman, Summers, and Panetta bought the bond-market argument and believed deficit reduction would accelerate economic growth. Rubin was just running the meeting, but I knew he agreed with them. So did Al Gore.
Bob Reich missed the meeting but sent me a memo the next day, arguing that while the debt was a higher percentage of the gross domestic product than it should be, investment in education, training, and non-defense research and development were all at a much lower percentage of GDP than in the preReagan years, and underinvestment was hurting the economy as much as the big deficits. He said the goal should not be to cut the deficit in half but to return it, and investments, to the percentage of GDP
they had been before the Reagan-Bush years. He argued that the investments would increase productivity, growth, and employment, enabling us to reduce the deficit, but if we went for deficit reduction only, a stagnant economy with anemic revenues couldn’t cut it in half anyway. I think Gene Sperling pretty much agreed with Reich.
While I was mulling it all over, we moved on to a discussion about how to achieve the deficit reduction we needed. In my campaign plan,
In the campaign, in addition to the budget cuts, I had also proposed raising a comparable amount in new revenues, all from wealthy individuals and corporations. Now, to cut the deficit in half we would have to raise more revenues, too. And we would almost certainly have to scrap the broad-based middle-class tax cut, though I was still determined to cut taxes for working families earning about $30,000 a year or less by doubling the Earned Income Tax Credit. Those people’s incomes had been losing ground for twenty years, and they needed the help; moreover, we had to make lower-income jobs more attractive than public assistance if we were to be successful in moving people from welfare to work. Lloyd Bentsen went over the list of possible tax increases, saying that any tax would be hard to pass and the most important thing was to prevail. If our plan failed in Congress, it could endanger my presidency. Bentsen said we should present a number of options to Congress, so that if I failed to pass one or two, I could still claim success and avoid being crippled politically.
