Never Say Never
By Rob Norton

(FORTUNE Magazine) – If you had told someone back at the beginning of this decade that the U.S. could have a balanced budget and no inflation by 1998, they'd have said you were dreaming. I know that for a fact, because in early 1990 I put that exact proposition to a couple of dozen professors, pols, and other Washington econowonks while reporting a feature story for this magazine. Some of them thought those were great goals; some thought they were dangerous. Nearly all thought them utterly unachievable.

The idea behind the story was to take at face value the avowed plans of George Bush's Office of Management and Budget and Alan Greenspan's Federal Reserve Board. "Bush's radical budget plan," as FORTUNE called it in the June 4, 1990, issue, envisioned surpluses beginning in 1994; Greenspan, for his part, had been talking up the idea of "price stability"--which was widely assumed to be an inflation rate between 1% and 2%. The most radical fed members were talking about zero inflation in five years. If both those dreams were to come true, we hypothesized, "the 1990s could become a golden age for U.S. business and U.S. competitiveness. Interest rates might free-fall to levels not seen since the 1960s...."

Many economists at the time didn't think these ideas were so radical, a significant shift of the consensus that had held sway in previous decades. By 1990 a healthy majority--Democrats and Republicans, Keynesians and neoclassicists--favored the goal of a budget surplus. Although there was less unanimity about inflation (many thought the 4%-to-5% range that existed then was the lowest we would ever see), more and more monetary economists--and, crucially, Fed policymakers--wanted to drive inflation lower.

But for all the new thinking and all the good intentions, both goals seemed pretty unrealistic in the spring of 1990. Not till later that year would Bush's big budget reform emerge. His agreement to raise taxes, despite his campaign pledge not to, probably cost him his reelection, but the budget reform also created the machinery that put the government back on the path to fiscal responsibility. (To give Bill Clinton his due, he's kept that machinery in place.)

The inflation rate was actually drifting upward in early 1990, and most fed watchers were betting Greenspan wouldn't do much to bring it back down, especially if the economy softened. Well, a recession began that summer, but the Greenspan Fed hung tough anyway, despite torrents of criticism. The credibility that the Fed won as a result is an important reason inflation has continued to fall ever since.

So what's the moral of this story? Be suspicious when the experts tell you that the status quo of the economy has become a steady state of nature. And never doubt that policy--good or bad--can have large consequences. The conventional wisdom today, for instance, holds that the Social Security system will begin sinking toward insolvency early in the next century, and that reforming it in any meaningful way is out of the question. Just remember: that's what they said about balancing the budget.