A nemesis no more, deficit rising
President Bush's push for tax cuts, despite a rise in the federal deficit, signals a return to supply-side economics.
President Bush's latest push to reduce taxes reflects a Republican approach to managing the economy that echoes Ronald Reagan more than his father: Stimulate the economy first and deficits will take care of themselves later.
Indeed, the idea of balancing the federal budget may today be farther down the list of Washington's priorities than at any time in 20 years.
In part this is due to the nation's circumstances. Terrorism, not red ink, appears the biggest threat to US security. Few experts judge that current deficits pose much of an economic threat.
But a marked decline in the 1990s political consensus on the need for austerity has also played a role. Mr. Bush is advocating tax cuts to fix the economy, while Democrats appear divided and unwilling to position themselves as the party of fiscal prudence.
"Once you have a legitimate reason to [unbalance the budget] it becomes very easy to lose fiscal discipline altogether," says Robert Bixby, head of the Concord Coalition, a group that promotes a balanced budget.
It has become incresingly clear in recent days that on money matters George W. Bush is literally not his father's kind of Republican. The elder Bush once denounced Reagan-style fiscal policies as "voodoo economics." Given a choice between raising taxes or allowing the deficit to increase during his own presidency, he chose the former.
But earlier this month, his son espoused one of the central premises of Reagan's supply-side economics: that tax cuts actually increase government revenue, by stimulating the economy.
Asked about this year's deficit of $159 billion after a Cabinet meeting, Bush insisted that his big tax cut of last year was not responsible for the red ink.
"The deficit would have been bigger without the tax-relief package," he said.
The administration is pushing to make permanent those aspects of its tax package which are set to expire. Its solution to the stumbling economy is in part a new package of tax cuts, perhaps to include a reduction in the corporate income tax rate. Treasury Secretary Paul O'Neill has even put together an internal group to mull major tax-code revisions.
Contrast this behavior with that of former GOP presidential nominee Bob Dole. As a Senator Dole was once denounced by a member of his own party, Rep. Newt Gingrich, as a "tax collector for the welfare state" for suggesting increased revenue enhancements.
Congressional Democrats, for their part, are quick to blame tax cuts as a major reason for the current run of red ink. But few are willing to call directly for tax-cut repeal. And in the meantime, many in the party are busy promoting more spending on prescription drugs for the elderly and other social programs.
This jumble on fiscal policy is "very analogous to the early Reagan years," says Robert Bixby of the Concord Coalition.
Deficit hawks such as Bixby look ahead and see nothing but trouble. Federal spending has been growing at an average of 8.5 percent a year in recent years, they note, and that is unlikely to change anytime soon.
Meanwhile, the Bush tax cut may well be made permanent - and it could be changed by expensive new rate reductions, such as changes in the alternative minimum tax, which increasingly affects middle-income citizens as well as its intended target, the upper class.
Add in increased Social Security and Medicare payments to care for retiring baby boomers, and the US might soon see the return of Reagan-size deficits of 6 percent of GDP, according to the Concord Coalition.
The conventional wisdom is that the return of such red ink would hurt the economy by sending interest rates booming upwards. That's because the government would need to borrow cash to finance its operations, forcing private borrowers to bid more to get funds they need.
BUT not all experts agree that this effect would actually occur. Red ink worries are exaggerated, they say - and one only has to look at the economy's performance under Reagan to see that. During Reagan's term business investment perked up, productivity began rising, and the US added 20 million jobs, says Stephen Entin, president of the Institute for Research on the Economics of Taxation, a group founded by veterans of Ronald Reagan's Treasury team.
"Deficits don't have the direct effect on interest rates that people used to teach," he says.
In part, says Mr. Entin, this is because world financial markets are so interconnected that the US government borrows cash in a huge global money market, not simply a smaller US one. Given that context it's actually very difficult for the US to "crowd out" private borrowers, Entin says.
In political terms, in any case, it may take some time for the deficit to once again become an item of national concern.
It would take a few years of red ink significantly greater than the US is now experiencing to get the attention of politicians and the public, according to Stan Collender, a budget expert at Fleishman-Hillard Inc. in Washington.
Given the tendency of the US political system to react slowly to most problems "It could easily be 2007 or 2008 at the earliest before anything happens," writes Collender in a recent column.