The Political Economy of the Budget Surplus in the United States

n 1998, the federal government of the United States reached a budget surplus for the first time in 30 years. Even though many commentators have described this event as a rare and major success, what is remarkable is not that the U.S. government has reached a surplus, but that this result is perceived as so "exceptional." In fact, given the strong expansion of the U.S. economy in the last eight years, and the "peace dividend" due to the end of the cold war, nobody should be overly surprised at the much improved fiscal balance. The reason why a surplus for the federal government appears so unusual is that American citizens, like those of many other industrial countries, have become accustomed to large and persistent deficits from the mid-1970s onward. In fact, many European countries, which have had much lower growth than the United States and higher interest rates, are still struggling with this legacy of accumulated debts.' While current budget surpluses should be viewed as relatively normal, the large budget deficits of the 1980s were exceptional. According to the "tax-smoothing" theory, the budget balance should be used as a buffer to allow tax rates to be approximately constant at the level that keeps the budget in intertemporal balance.2 Thus, temporary deficits are expected to occur during recessions and