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Reply to Brian Domitrovic

I suggest in The Age of Deficits that the budget is an important field for historical study but has suffered relative neglect from historians because of the “esoteric, elitist and endless” nature of this policy domain (x). Brian Domitrovic’s fair and well-reasoned review is in agreement about the historical significance of budget policy. While I have reservations about some of his criticisms, they demand constructive engagement that hopefully follows below.

Domitrovic ends with the interesting observation that the Age of Deficits “is best understood” as the era following the abandonment of the Bretton Woods system of international monetary arrangements that underpinned the postwar growth of the world economy. In his view, the termination of the fixed rate of dollar convertibility into gold in 1971 and the final abandonment of fixed-currency exchange rates in 1973 opened the way to the operation of fiscal imbalances of previously unthinkable regularity and size. It is certainly true, as I acknowledge (37), that concerns about foreign holders of dollars exchanging these for gold and the consequent threat to American reserves impelled deficit control in the postwar era, especially in 1959–60 and 1968.

However, I would place greater emphasis on two other developments for the emergence of the Age of Deficits. One was the shift from aggregative fiscal policy to program-oriented budgeting in the wake of Keynesianism’s eclipse in the stagflation-hit 1970s. This marked the end of rule-driven budgets. In the first 150 years of fiscal operations under the Constitution, the balanced-budget rule—namely, the belief that the federal government had an obligation to balance its annual outlays and income except in the exceptional circumstances of war and recession—dominated policymaking. Despite Domitrovic’s disparagement of it, the Keynesian doctrine that shaped fiscal policy from the late 1930s to the 1970s could also be characterized as rule-driven. Far from being predicated on the belief that the sky was the limit for the deficit, it prescribed anti-inflation restraint during prosperity (manifest in the stabilizing budget policy of the Truman-Eisenhower era) and generally emphasized the importance of assessing the level of deficit (or surplus) that would best serve economic growth (even in the 1960s era of the “new economics”). [End Page 444] Program-oriented budgeting, by contrast, placed more emphasis on budget composition rather than the aggregates that produced deficits and surpluses. Economist Herbert Stein, a moderate conservative, characterized this development as “the disintegration of fiscal policy.”

Related to this change, the budget increasingly lost suppleness as a result of the post-1960s rise of the entitlement state. From 1945 to the Vietnam era, defense regularly consumed the lion’s share of the budget because of Cold War imperatives. Moreover, discretionary programs, including domestic ones, accounted for the bulk of spending. Automatic outlays fixed in law (mandatory payments to individuals and interest payment on the public debt) made up only 33.7 percent of the budget in FY1960. The expansion of Social Security, the creation of new entitlements in the 1960s—notably Medicare and Medicaid—and the index-linking of some programs to inflation in the 1970s had a significant effect on budget composition. By FY2000, automatic payments to individuals constituted some 59 percent of total federal spending and interest payments accounted for 12.5 percent, leaving less than a 30 percent share for the discretionary defense and domestic appropriations that were subject to annual control by budget policymakers.

Domitrovic also suggests that my book “gets across the sense that presidents have been relatively helpless” against the burgeoning deficit. Whether this is an apt conclusion to draw from its reading is a matter for debate. Presidents may lack the constitutional power of the purse, but it is my contention that their powers of agenda-setting and persuasion make them the principal actor in the making of budget policy. The presidencies of Ronald Reagan, Bill Clinton, and George W. Bush arguably support this view. The point is that only Clinton made deficit reduction his priority; Reagan and Bush were more focused on their program objectives of small taxes and big defense. Even presidents perceived as failed budget leaders were significant...