The questions at White House press conferences rarely are phrased the way the bond market would like them to be worded, but there was an exception last week. President Clinton's answer needs examination, and it's sobering.
Because questions so germane to the credit markets are so rare, it's worth repeating.
"Mr. President," a reporter asked, "your economic plan would reduce the budget deficit by $500 billion over five years, which is a significant improvement over what we're seen in the past. But your critics would point out that the budget deficit would continue to mount by hundreds of billions of dollars a year and that your attack on the deficit is limited to lowering projected spending increases rather than taking the much harder tack of making real cutbacks in the budget. Can't you do more to deal with the problem of this deficit and runaway spending?"
We have asked the same question, but we've never had the chance to get a direct answer from President Clinton. Here's his reply:
"It is absolutely true," the President said, "that if this whole thing is adopted, or any other deficit reduction plan that has been presented today is adopted, by the fifth year the deficit starts to inch up again, and you don't get down to zero. Now that is true. But why is that? That is because primarily of the projected exploding costs in medical care through Medicare and Medicaid. And because we have programs like Social Security and other retirement programs where people are given cost-of-living increases year in and year out, something that most Americans support. But the prime culprit here is ... medical ... costs ... They've been going up way faster than inflation.
"Now I want to make two points: Why did we reduce the deficit only $500 billion over five years, even though that's a huge amount? Because it was the considered judgment of the economic team - Secretary Bentsen, Mr. Panetta, Mr. Rubin - that in a recession there is a limit to how fast you can contract the deficit. And that this would be a very rapid reduction of the deficit in a time when there is very slow economic growth around the globe. We think it will actually lead to some expansion of the economic activity. Why? Because there's so much debt built into our system at high interest rates that if people just go refinance all their homes and their business loans it will give them a lot of cash in their pocket and that will stimulate the economy to grow.
"Secondly, it is our considered judgment that we cannot get the deficit down to zero, which is where it ought to be, until we do something about health-care costs, which is why the next big piece of this administration's work is to provide a comprehensive health-care plan that will bring health-care costs in line with inflation."
Clinton had had a good week. His nomination of Judge Ruth Bader Ginsburg to the Supreme Court had been widely applauded. Senators on the Finance Committee had reached an accord on the deficit reduction package. Plans for campaign refinance reform and a national service corps moved ahead. So the President sounded more upbeat, more in charge, and it was a relief after weeks of unrelenting reports about one White House misstep after another.
In tackling the question about doing more to deal with the deficit and runaway spending, Clinton revealed two things. First, it's clear that he continues to view the domestic economy as being in a recession, which is an inaccurate view. Consequently, he is likely to do less deficit reducing than the economy would, in our view, withstand. Second, deficit reduction over $500 billion will depend health-care reform, and that is an unknown.
"Can't you do more to deal with the problem of this deficit and run-away spending.?" That was the straightforward question, and Cliton's answer could have been shorter and clearer.