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Tuesday, February 3, 1998

Global View
Balanced U.S. Budgets
Ad Infinitum? Don't Bet On It


WASHINGTON - Professors of political science in years to come may well assign their students to read Bill Clinton's State of the Union address of last week. Seldom has political oratory been so beautifully polished--and so divorced from realities. The magic worked. The man walked into the House chamber disgraced by one too many scandals and walked out with his highest voter approval ratings ever, if you can believe the pollsters. A truly amazing performance.

But keep in mind that, however brilliant, it was only a performance. It is true that the state of the American union is strong. It is true that inflation and unemployment are low, and that the American economy has just enjoyed a new surge of growth (an annual rate of 4.3% in the fourth quarter of last year). But precious little of that originated in Mr. Clinton's disordered White House. Even the president himself was more subtle than in the past with his self-congratulations. This year, he gave the American people some of the credit for good times. His speech writer must have suggested dropping the grating claim that he, personally, is "growing the economy."

No one, however, cautioned him to cut back on obfuscation and hyperbole. His brag about the U.S. having its "smallest government in 35 years" may have some basis, but not in anything that counts. Federal revenues as a percentage of gross domestic product are approaching record levels, even as GDP climbs at a good clip. The rising economy has lifted all boats and narrowed the federal deficit, but it hasn't curbed government expansionism. Indeed, Senate Majority Leader Trent Lott observed in his response to Mr. Clinton's speech that taxes at all levels are now consuming 38% of the incomes of American families.

That huge outlay may be buying somewhat better value, but not from the feds. State governors have seized the welfare system and are cleaning it up, with budget savings at both state and federal levels. Some cities, such as New York, are attacking crime more efficiently. States that have adopted school choice are demonstrating that schools can be improved by broader private efforts.

No regard for the achievements of others, however, prevented Mr. Clinton from punching every political hot button he could reach: Better schools, child care, college for everyone, a "G.I. Bill" for workers to ease their move to new jobs, a cleaner environment. Yet the president has been in office for five years and instances in which he could cite notable federal government achievements were scarce. Indeed, the areas where the federal government is most involved--health care, for example--are where he described serious problems. He was, in effect, campaigning against the federal health care bureaucracy he and Mrs. Clinton have sought to expand when he urged Congress to pass a "bill of rights" for patients. And the Internal Revenue Service, whose abuses he promised to correct, has grown confused and surly under his jurisdiction, not someone else's.

Curiously enough, the president had little to say about his primary area of responsibility, national security. To be sure, there is no clear and present danger to the U.S. and, even if there were, the U.S. military retains sufficient strength, despite sharp cutbacks, to deal with any conceivable threat. But clearly the president is not much interested in defense. What budget savings he has made have been at the expense of preparedness. U.S. forces are stretched thinner than most civilians realize as they carry out their missions in the Persian Gulf, Bosnia, Europe and the Pacific. And there is as yet no defense against the long-range missiles unfriendly nations such as Iran are developing.

The most striking part of the State of the Union address was the president's promises of "balanced budgets as far as the eye can see." The U.S. is projecting a budget deficit of only $10 billion in the fiscal year ending Sept. 30 and a balanced budget thereafter. The bond markets have saluted this development with lower interest rates, even on securities with long maturities. Corporate profits have gotten a boost from lower borrowing costs, and of course, lower rates cut interest costs at all levels of government.

The economic circumstances surrounding the president's address were indeed so serendipitous--and his rhetorical skills so well tuned to exploiting them--that it is no wonder that his poll ratings rose. Good times can do wonders for a president. Voters are willing to overlook shortcomings, which in Bill Clinton are manifold, so long as things are going well.

But where is the assurance that things will continue going well? Those balanced budgets Mr. Clinton promises are only prospective, not a present reality. He himself will make them harder to achieve with the ambitious spending program he outlined. If the American economy should slow this year, as many economists predict it will, the government's revenues will fall and its spending needs will rise, as more people seek the shelter of federal social programs. That surplus Mr. Clinton wants to spend could evaporate in a month.

Asia, a very important part of the global economy, has suffered a major reverse. Japan is floundering because of its political inability to come to grips with a long-running financial crisis. The former Asian "tigers" have impoverished their peoples with devaluations and will be a reduced market for Western goods. They are desperately trying to make use of the low production costs they have achieved by devaluations to export their way out of their recessions and rebuild their supplies of foreign currencies. They are less inclined than ever to accept the demands of Bill Clinton, Al Gore and the AFL-CIO that they raise their labor and environmental standards.

The loss of Asian markets and the competition from Asian goods will surely affect the profits (and hence tax payments to the government) of American corporations. The Organization for Economic Cooperation and Development has estimated that the Asian crisis will subtract 0.7 of a percentage point from U.S. GDP this year. That may be a modest reckoning of the deflationary effects from Asia. But give Bill Clinton credit. Last Tuesday's was a bravura performance. And he may yet go down in history not as Slick Willie but Lucky Bill.

Copyright 1998 Dow Jones & Company, Inc. All Rights Reserved.


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