A (Cautionary) Tale of Two
Budget Wars

Comparing the shutdowns in the mid-Nineties with today’s situation


These days there are two types of people on Capitol Hill: those who believe little or nothing has changed since the last round of government shutdowns in 1995 and 1996, and those who think everything has changed.

Perhaps the most striking fact one encounters in comparing the last shutdown with the current budget mess is this: Back then, the Republican-controlled Congress sent President Clinton a legislative package that ranks among the most ambitious efforts to scale back the federal government in our history, even as the economy was growing, inflation and unemployment were on the decline, and the level of federal debt and overall federal spending were, by any historical standard, at manageable levels.

In 1996 the economy was humming along, with growth at an acceptable 3.7 percent. Inflation was 3 percent and falling. The unemployment rate stood at what many economists then theorized to be the level of full employment, 5.4 percent and falling. At 21 percent of GDP, total federal spending was as low as it had been in three decades. The budget deficit clocked in at less than 2 percent of GDP. Likewise, total federal debt held by the public was considerably lower than today, both in absolute terms (about a third of its current level) and as a percentage of the overall economy (50 percent, compared with a projected level of 70 percent of GDP for 2011).

For most voters, life was good. Any threat posed by excessive debt and unbridled entitlement expenditures was purely theoretical — a blip on the distant horizon.

So, what did the new Republican Congress put in front of the American people? A remarkable — and remarkably prescient — set of reforms designed to forestall precisely the sort of fiscal calamity we face today.

Let’s review the highlights of the proposal Clinton found worthy of his veto pen:

— Medicare: A broad-based reform of this perennial third rail of politics would have lowered projected Medicare spending by $270 billion over seven years through a mix of structural reforms (seniors would have been able to choose from among an array of plan options), means-testing, and lower reimbursement levels for Medicare providers.

● Medicaid: Even more ambitious reforms would have given the states enormous flexibility to design the intricacies of the program. Medicaid would cease to be an open-ended entitlement program and become instead a block grant to the states with the federal contribution capped at levels that would have shaved $163 billion off of baseline spending over seven years.

● Welfare reform: A precursor to the ultimately successful 1996 welfare reform, this set of policies included work requirements, a five-year limit on eligibility, limits on the Earned Income Tax Credit, and denial of benefits to non-citizens. All of this would have saved taxpayers nearly $115 billion over seven years.

● Freedom to farm: Farmers would have had more freedom to plant the crops they wanted to plant in exchange for limits of agriculture subsidies, saving $13 billion.

● Arctic National Wildlife Refuge: The proposal would have opened up this oil-rich region of Alaska to exploration and drilling in hopes of ultimately producing 1 million barrels of oil per day.

● Tax relief: The proposal contained both a $500-per-child tax credit and a significant cut in the top rate on capital gains, from 35 percent to 28 percent. Over seven years, these changes would have reduced the tax burden by $183 billion. 

● And more: The package also would have scaled back a wide array of politically sensitive programs, including ones for student loans, veterans, and low-income housing. It would have required federal workers to contribute more to their pensions (imagine that!) and increased the fees charged to use our national parks.