President Clinton's economic plan scraped out a victory in the House of Representatives last Thursday night, and his narrow win was a plus for the bond market.
The market didn't think so on Friday, and the 30-year Treasury bond by early afternoon had dropped 23/32 to raise its yield to 6.98% from 6.92% on Thursday. That was the immediate response, but there are too many political chapters still to be written over the next several months to reach any firm long-term conclusions. The important point is that there is movement in Washington.
If Clinton had lost on Thursday, it's difficult to see how any of the administration's important proposals - health-care changes, welfare reform, a national service program - would stand a chance. Instead, the country probably would fall back into gridlock, a period of drift much like the last half of the Bush administration with economic sluggishness and increasing federal deficits. Such periods may be good for bonds in the short run but not in the long run.
But Clinton won last Thursday, and that showed there is some chance the federal government may gain better control over its finances. Conservative Democrats forced Clinton to accept limits on the growth of entitlement programs - not enough but better than nothing. As Carol Cox Wait, head of the Committee for a Responsible Federal Budget, put it: "Did they do anything significant on entitlements? Yes, they did. Did they do nearly enough? No, they didn't."
Conservatives, of course, scoff. Richard Armey, a Republican member of the House from Texas, looked at the Clinton program and declared flatly that "there is no spending discipline in this package." Period.
As a people, Americans today see no value in spending discipline. There is plenty of shouting to the contrary, to be sure, but no one will give up his timbering subsidies, her welfare mother payments, his Medicaid, her Social Security, his food stamps, her local Air Force base. The Clinton program is said to reduce annual budget deficits to $200 billion, and that's a beginning.
If the Clinton package remains more or less intact as it moves through the Senate, we'll get a big tax increase and the $200 billion deficits. After that, the credit markets will face Clinton's health-care reform, its costs and economic impact. This outlook doesn't present a formula for an expanding economy and higher interest rates, and so the bond market may fare pretty well this year.
Annual deficits of $200 billion mean the national debt will climb $800 billion during Clinton's tenure, and the increase will more likely wind up at a trillion. That's too large for the long-term good of the economy, and the Democrats had better begin to make plans to cut it back. For all that, a step away from gridlock is a start.