President-elect Bill Clinton's televised seminar in Little Rock was positive for the economy. It made reduction of the federal budget deficit possibility.
The possibility is a faint one, to be sure, but it is nevertheless real for the first time in more than a decade, and that is heartening news. No one knows how much debt is too much debt, but many Americans apparently think we're getting close. A poll by The Wall Street Journal and NBC News revealed 41% of them think reducing the federal debt is the most important aspect of Clinton's economic program, and Clinton himself appears to agree.
"I think," he said in an interview with Wall Street Journal staff, "there is a real consensus among the leadership and the Congress...and among those people who were at that table [in Little Rock], that whatever we do in the short run, we need a multiyear program that simultaneously brings down the deficit credibly and increases...investment."
The projections of federal budgets at the Little Rock seminar showed $300 billion deficits persisting longer than earlier estimates, and that appeared to impress the President-elect. By the end of the seminar, deficit reduction seemed to have risen in importance while short-term economic stimulus appeared to have declined.
Back when President Reagan was in office, deficit reduction was out of the question as long as he increased military spending to the $300 billion level and cut taxes. Under President Bush, deficit reduction was out of the question as Federal spending increased and the economy stagnated. The national debt grew by leaps and bounds, but the growth didn't seem to hurt bonds, and interest rates declined during the Reagan-bush years. The milestones of these years are two long-term Treasury bond issues: 15 4%s sold in November 1981 and 71/4%s sold in August 1992.
If long-term bond yields can come down so spectacularly - and a drop of 850 basis points is spectacular if you're a bond maven - why pay attention to the federal budget deficit? Well, most importantly, real bond yields, bond yields adjusted for inflation, have risen, not declined. Investors in the last days of the Carter administration could buy 12 3/4% Treasury bonds while consumer prices were climbing at an annual rate of 13 1/2%. Consumer prices last month, by contrast, rose at an annual rate of 2.4%, making the 7.4% now available on long-term Treasury bonds, look generous indeed. A real yield of 5% is better than an after-inflation yield of minus 75 basis points.
Huge federal deficits do raise real interest rates, making all debt more expensive. Federal borrowing to finance huge budget deficits eats up savings that might be better invested in productive enter- prise. If Clinton can bring the government's borrowing under better control, the economy also might do better. A little hope is reasonable.