Bush’s Fiscal Funhouse
No matter how big the federal deficit may appear to be, the economy can quickly grow its way out. That, anyway, is President Bush’s claim. To his coterie of supply-side enthusiasts, tax cuts are the equivalent of a real perpetual motion machine. The faster you cut taxes, so the theory goes, the more revenue the federal Treasury should receive as the economy booms.
Considering what that theory did to the U.S. economy under Ronald Reagan, it’s the triumph of hope over experience. Reagan scrambled to enact tax increases to ameliorate huge deficits.
Even as the current White House clings to the theory, a new report from the Congressional Budget Office projects a $422-billion deficit this year and $2.3 trillion over the next decade, even if the current tax cuts, technically set to expire over the next few years, are not extended. If they are, it projects a tab of $4.5 trillion. The $2.3 trillion is already higher than the office’s previous estimate in March because of increased spending by Congress, which is stuck with paying for, among other things, prolonged wars in Iraq and Afghanistan.
In other words, this deficit, unlike previous ones, is not a blip, but a structural one. To make it look as though the deficit actually were on the mend, the administration is trumpeting the current record $422-billion estimate as lower than its original, deliberately overstated $445-billion prediction in July. It isn’t as though Congress is resisting. To disguise the true costs of many tax cuts, Congress phases them out each year on paper, only to renew them in practice. Even the CBO’s $4.5-trillion deficit over 10 years is almost surely too optimistic -- it’s based on the assumption that funding for domestic programs will not rise faster than inflation and not keep pace with population growth.
But couldn’t domestic spending be reined in to help curb the deficit? Not exactly. About 70% of spending increases since 2001 have been for defense, homeland security and international affairs. Tax cuts account for about 58% of the budget deficit in 2004. If Congress decided to target areas like education and health, the most it could painfully squeeze out would be a few billion.
Federal Reserve Chairman Alan Greenspan keeps warning that federal profligacy will force interests rates higher to avert inflation. He reminded Congress last week of Economics 101: higher interest rates choke off economic growth and increase mortgage rates and unemployment. To avoid this scenario, Congress would have to return to so-called “pay as you go” rules in which spending increases are matched by tax hikes, and tax cuts by lower spending.
Bush continues to peddle the illusion of costless tax cuts. If his cuts are extended, even increased, it’s small consolation that the myth that they can pay for themselves will be shattered.