Historical Balance of US Federal Budget and Current Economic Trends

When was the last time a US president submitted a budget that was balanced? This question invites us to delve into the history and the economic reasons behind the consistent budget deficits in the United States. The last time a balanced federal budget was achieved in the United States was in 1997, under President Bill Clinton, when Newt Gingrich, the Speaker of the House of Representatives, balanced the budget. This marked a significant period of fiscal discipline, occurring before former President George H.W. Bush had raised taxes, which contributed to the balanced budget.

However, the hope for a balanced budget did not last long. Clinton fought hard with Gingrich to create a $200 billion deficit, a battle that Gingrich and his Republican allies eventually won. This political struggle had serious consequences, as Bush's presidency was ended by Clinton in 1996, and Gingrich lost his speakership in 1998. This event served as a sobering lesson for politicians from both parties, leading to a realization that balanced budgets are rare and should not be the norm.

Economic Impact of Balanced Budgets

Further exploration of the balanced budget in 1997 reveals that while it is not uncommon for balanced budgets to follow financial crises, such as in the 2001 recession, the outcome is often not beneficial. A balanced budget in 1997 may have seemed positive, but it aligns with the belief that a balanced budget can tamp down economic growth by reducing too much money from the economy. This could be necessary only if the economy is over-heated. Yet, the following recession, which began in the early 2000s, coincided with the balanced budget, even though it was also in the wake of the 9/11 terrorist attacks.

This brings us to the fundamental economic principle that perpetual deficits are not just a necessity but a requirement. The non-government sectors require surpluses to thrive, necessitating government deficits. This relationship cannot be overemphasized as it underscores the congressional and presidential understanding that surplus budgets are not sustainable for economic prosperity.

Secular Trend Towards Deficits

The requirement for deficits stems from a deeper economic principle: the federal government is the only entity capable of creating and injecting net financial assets into the economy. While commercial banks and central banks can create money, they do not create net financial assets. These assets are equally important as they equal the net money supply, a crucial economic indicator.

It is essential to understand that the national debt is akin to a running total of what has been borrowed, and the budget deficit is the shortfall between tax revenue and expenses, whether actual or projected. When budgeted revenue equals or exceeds budgeted expenses, the budget is considered balanced. The last balanced budget in the United States was Clinton’s last yearly budget for fiscal year 2000-2001, a period marked by fiscal responsibility and economic growth.

To summarize, the historical achievement of a balanced federal budget is notable but not the norm. The underlying economic principles suggest that deficits are essential for economic growth and prosperity. Understanding and accepting this can help policymakers design fiscal policies that promote sustainable economic health without eroding the very foundation of the financial system.