ECONOMIC REPORT OF THE PRESIDENT

Box 7-1: Former CEA Chair Laura D’Andrea Tyson (1993 – 1995)
A primary responsibility of CEA along with OMB and the Treasury
is the development of economic forecasts on which the administration’s
annual and long-term budget projections depend. The budget deficit,
widely used as an indicator of fiscal policy stance and central to political
debates, is highly sensitive to the economy’s performance. Yet forecasting
that performance is an exercise fraught with uncertainty and subject
to significant errors that get larger as the forecasting period lengthens.
In January 1993, at the beginning of the Clinton Presidency, the
economy was underperforming relative to forecasts, and much weaker
than expected macroeconomic conditions were producing much higher
than expected budget deficits. Confronting a deteriorating budgetary
outlook, the new Clinton CEA worked with the rest of the Clinton
economic team to develop a budget plan to cut the deficit by $500 billion
over 5 years while honoring the President’s top fiscal priorities to
increase public investment and expand the earned income tax credit. The
administration’s economic forecasts underpinning this plan reflected
the prevailing consensus among economists that the growth rate of
potential output was around 2.5%, resting on a labor productivity growth
rate in the 1.2% range, and a NAIRU of about 5.5%. Yet this prevailing
consensus proved to be wrong—during the next five years, the economy
outperformed the administration’s forecasts by a considerable margin.
But in January 1995, despite passage of Clinton’s budget plan
in August 1993 and the stronger than expected economic conditions
it fostered, projected budget deficits were still increasing, albeit at a
slower pace, and the new Republican controlled Congress was demanding
an administration plan to balance the budget within 7 years. As
the underlying economic forecasts improved, CEA helped craft a new
administration plan to achieve balance within 10 years without economically
indefensible cuts in spending in priority areas including health care,
education, infrastructure and research. The administration’s plan was
rejected by Congress, which used government shutdowns and threats of
default on the federal debt to force the administration’s hand. These tactics
failed and in 1996, the administration and Congress agreed instead
on a modest budget package that funded the government at current-law
levels.
The economy continued to outperform forecasts, and CEA worked
with President Clinton to develop a plan to balance the budget in 5 years.
He announced the plan in February 1997 shortly after his re-election.
Critics accused the President of “flip flopping” on the budget, but
what had changed was not his fiscal policy stance, but the surprisingly
strong economic conditions that resulted in larger than expected pro-
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