Economic Report of the President 1994 - The American Presidency ...

for inflation was on average roughly balanced for decades (Table 1-1). This approximate balance was not achieved by any formal, legalrequirement, but rather through an informal, unstated politicalconsensus.TABLE 1-1.—Structural Budget Deficit as Percent of GDPFiscal yearsAdjusted deficit as percentof GDPi1959-19821983-19931994-1998 (forecast)1 Adjusted deficit is unified structural budget deficit corrected for depreciation of the value of Federal debt due to inflation.Sources: Office of Management and Budget, Congressional Budget Office, and Council of Economic Advisers.The budget picture changed dramatically with the tax cuts of theearly 1980s, and the structural, inflation-adjusted budget began todisplay chronic, large deficits for the first time. The deficit in fiscal1992, the last year before the election of President Clinton, was awhopping $290 billion in the unified budget and $131 billion on astructural, inflation-adjusted basis. Worse yet, both the deficit andthe debt-GDP ratio were expected to rise further (Charts l-4a andDeficits of this magnitude—around 5 percent of GDP—wouldhave been far less worrisome if American households were savingenough to cover both the government budget deficit and the needsof business to finance investment. But, in fact, American householdsaving rates not only are among the lowest in the world, but actuallyfell in the 1980s. So for both of these reasons—declining householdsaving and rising budget deficits—national saving as a shareof GDP dropped sharply in the 1980s.Casual discussions often equate national saving with domesticinvestment, but the two can differ in an open economy (Box 1-2).And in the United States of the 1980s, they differed dramatically.While national saving was falling as a share of GDP, the share ofdomestic investment, although low by international standards, wasroughly constant. To plug the gap between saving and investment,the United States had to import massive amounts of foreign capital.In consequence, our current account balance went from asmall surplus to a large deficit in the 1980s.All this foreign capital had its positive side: By limiting the riseof real U.S. interest rates, it partly shielded investment from theconsequences of huge Federal deficits. But it left the United Statesthe greatest debtor nation in the world. Even more disturbing, allthis borrowing from abroad went to maintaining the Nation's comparativelymeager investment rate, not to increasing it.-0.11.9.827