How Alice Rivlin Helped Save the American Economy
(Bloomberg Opinion) -- In a career in public service that spanned five decades, Alice Rivlin was known above all for her obsession with fiscal responsibility. When she died yesterday, the lead sentence in one obituary called her “a relentless fighter for deficit reduction.”
Now such concerns seem quaint. Republicans voted two years ago for a combination of tax cuts and spending increases that will raise the deficit to $1 trillion by 2020. Progressive Democrats currently have a sweeping climate change proposal premised on the idea that deficit spending can pay for an utter transformation of the U.S. economy.
And it’s not just politicians. The former president of the American Economic Association was co-editor of a book published this year asking economists to rethink their commitments to balanced budgets and low inflation. As an economist myself, I have used much of my writing to try and persuade my colleagues and the business community that deficit spending is not as harmful as it used to be.
So it’s easy to forget that things were not always so. And the career of Alice Rivlin — who founded the Congressional Budget Office in the 1970s and in the 1990s served as director of the White House Office of Management and Budget and vice chair of the Federal Reserve — shows how a commitment to principles can not only shape public debate but alter the course of the economy.
Some history: In the 1970s the U.S. was faced with a series of unpalatable choices. Inflation rates were rising, economic growth was slowing and taxes were eating into an ever larger portion of household income. Something had to give. But it was next to impossible to get Congress to agree on what. In part to help break this impasse, in 1974 Congress created the CBO to create a nonpartisan source of information about the economy and the federal budget.
Rivlin was its first director, and from 1975 to 1983 she built the CBO into one of the most respected and powerful institutions in Washington. The CBO is the most authoritative source of projections on federal revenue, expenditures and long-term deficits, and members of Congress know their tax and spending proposals probably won’t succeed unless they accord with those projections.
By the mid-1970s, with the long postwar boom finally fading, both inflation and unemployment began creeping higher in the U.S. Federal spending, which had taken up only 16% of GDP in 1965, was nearly 20% in 1975. Inflation pushed taxpayers into higher brackets and increased effective tax rates on most Americans.
Ronald Reagan was elected president in 1980 promising a military buildup and a major tax cut. Budget hawks like Rivlin forced a showdown: Reagan’s plans, they argued, would send the deficits soaring and drive inflation even higher. Reagan chose a compromise route — cutting taxes and supporting Federal Reserve Chairman Paul Volcker’s efforts to rein in inflation. The results were a mixed bag. Inflation fell and growth picked up, but the deficit still rose.
It wasn’t until 1993 that the budget hawks really got their way. President Bill Clinton, under whom Rivlin served as director of the OMB, signed into law a series of tax increases and spending cuts that increased government revenue to 20% of GDP, from 17%, and lowered expenditures from 20.5% to 17.5%. The result was a sustained period of budget surpluses.
What had seemed an insurmountable problem was largely solved. That required political courage, yes, but also the integrity and expertise of public servants like Rivlin. She helped Washington adjust to the harsh realities of living within its means. It was a corrective as badly needed then as an acceptance of new economic realities is needed now.
Changing minds is hard, and requires people who not only know their stuff but are willing to hold fast to their principles. Alice Rivlin was one of those people. That’s why, despite my disagreements with budget hawks, I have learned a lot from her.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.
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