How to Balance the Federal Budget

Last Updated Nov 20, 2009 7:20 PM EST

It was the end of a long work day, but back then, the days seemed to go a lot quicker than they do now. It was 1998 and the stock market's unprecedented bull run - fueled by the dot-com boom - seemed like it would never end.

At the tail end of a phone interview with USA Today's Silicon Valley bureau chief, Julie Schmit asked if I would be a source for another reporter's story on how unbudgeted tax income from the stock market surge was responsible for the nation's first budget surplus in almost 30 years.

For those who were too young or have short memories, at that time, the market had indeed seen an impressive bull run. But as they say, "they ain't seen nothin' yet." Over the next 3 years the NASDAQ would skyrocket 250 percent, only to plummet right back down to where it started. Maybe we'd all just as soon forget that ever happened.

And yet, there was a remarkable benefit that, for the most part, slipped under most of our radar screens. But when you read this excerpt from the USA Today archives, the lesson we, in the deficit and budget-challenged present, can learn from history comes into focus:

U.S. Budget Bonus: Thank Bull Market for Deficit's End
Sep 30, 1998, Paul Wiseman

Politicians here like to claim credit for balancing the federal budget.

Maybe Jeff Osborn should take a bow, too.

A one-time sales executive with the high-flying Internet company UUNet Technologies, Osborn's personal wealth soared with UUNet's stock price. As a result, he has paid about $1 million in federal taxes each of the past two years.

"I feel personally responsible" for balancing the budget, he jokes. "I keep waiting for an invitation to the Lincoln bedroom."

Of course, Osborn's impressive tax contributions probably won't get him any recognition from the White House. His payments aren't even a ripple in the $1.6 trillion-a-year federal budget.

But he's onto something.

The stock market surge that made him rich and gave him huge tax bills has dumped so much unbudgeted revenue into the Treasury that the federal government this year will report its first budget surplus in almost three decades. President Clinton is expected to announce today the surplus will approach $70 billion for fiscal 1998, which ends today. That snaps a run of annual deficits dating back to 1969.

"Most of it's coming from the stock market," says David Wyss, chief economist at Standard & Poor's DRI. "That's been the big surprise of the last two years."

Explaining why the Treasury took in so much more tax revenue than expected this past year, forecasters at the Congressional Budget Office (CBO) cited "unusually high realizations of capital gains." They also noted that "a growing share of income was earned by people at the top of the income ladder..."

Fast-forward to the present: we're clearly entering uncharted deficit waters. And while I'm not a fan of super-high tax rates or bubble and bust-fueled economic cycles, throwing the capitalism baby out with the boom-bust bathwater isn't the answer either. Like it or not, economic expansion - big and small business growth - is indeed the only way out of our current predicament -- and the only way to prosperity.