Everything that could go right has gone right. Paradoxically, the real test of fiscal leadership for Clinton and his successors may be how they manage the good times ahead. For while there are solid reasons to believe that the budget will remain in surplus for a decade or more, the retirement of the baby boomers is certain to push the budget deeply into the red soon thereafter unless Washington acts preemptively to curtail the future cost of Social Security and Medicare. A glimmer from the end of the deficit tunnel was first spotted in 1990, when President George Bush broke his campaign pledge and acceded to a tax increase. A second round of deficit cutting in 1993 also made a big difference, as has the Midas touch of the Federal Reserve in managing monetary policy.
Good news begats more good news.
The quicker return to budget surplus means a smaller national debt down the road, along with lower interest rates and smaller annual interest payments to service the debt. At that point, the retirement of the first wave of aging baby boomers, who are entitled to generous Social Security and Medicare benefits, will darken the budget picture. But Reischauer points out that the ratio of federal debt to gross domestic product, arguably the most objective measure of the burden of the debt, will probably continue to fall, with debt declining from the current level of 48 percent of GDP to just 20 percent in 2015. By the same token, even a modest stumble from the straight and narrow path of low inflation and 2 percent-plus economic growth would reduce projected revenues and ratchet up spending on the social safety net. But the deeper fear among economists is that budget bliss will persist well into the next decade, undermining the sense of urgency in rethinking how the nation will pay for the retirement of the baby boomers.