The Bush Budget: Deficits Aren’t The Problem


President Bush has sent to Congress his Budget for fiscal 2004 (starting in October), calling for $2.23 trillion in expenditures and a deficit of $304 billion, compared to $159 billion of red ink last year and a surplus of $127 billion in 2001. For the President’s Budget Director, Mitch Daniels, this deficit is “acceptable,” because it amounts to only 2.7 percent of our gross domestic product, half as much as the record peacetime deficits of the mid 1980s. The Senate Minority Leader, Democrat Tom Daschle of South Dakota, replies that, with deficits of this size, we now have “the most fiscally irresponsible administration in history.”


Daniels is right. A current deficit of $304 billion is reasonable in a stagnating $10-trillion economy like ours, which needs more spending pumped into it from any source. If private consumption and investment are marking time, as they are, only government can do the job.


Since Bill Clinton excluded what he called “the left” from his administration in the 1990s, Democrats, in one of the great role reversals of American political history, have become the party of balanced budgets and debt reduction.


Now it’s Democrats who proclaim that budget deficits drive up interest rates and “crowd out” private investment, as government borrowing competes with private investment for a fixed supply of loanable funds. There certainly are times when this can happen–when an economy is operating at or near full employment, with no reserves of labor and industrial capacity to spare, but not during recessions like the one from which we have yet to emerge. In some periods when federal deficits swelled, interest rates even declined, as during the 1980s. Rates have also fallen over the past 12 to 18 months, as the budget shifted from surplus back into deficit.


And it’s the Democrats who warn that deficits, which increase our national debt (the total stock of U.S. government bonds issued to cover all annual deficits to date), will leave future generations with a great “burden” and make it impossible to “save” Social Security.


Nonsense. Finance is a source of mystification for people across the political spectrum, and the “burden” of the national debt on future generations is a prime example. In fact, the burden of the national debt is practically zero. The only possible burden comes from interest paid to holders of U.S. government bonds. Some of the interest is paid to foreign bondholders and drains income out of the country; most of it is paid to U.S. residents who are largely in the wealthy class, forcing a redistribution of income from taxpayers toward the rich. But both of these effects are small-scale, and any undesirable income redistribution can be cancelled out by increasing taxes on those who can afford to pay, including wealthy bondholders–although, to be sure, this is easier said than done.


The real costs of the national debt, overwhelmingly, are borne by those of us who live during years when deficits occur, because they allow the government, by spending more money, to shift resources from private to public uses. But if deficits pay for the likes of education and health, rail and mass transit, national parks and forests, and environmental protection, future generations will be better off, not worse: public investments like these are more productive, and more desirable, than a ton of private investment–remember the telecom-internet boom of the 1990s?


Current deficits, especially when unemployment is high and business investment lagging, are fiscally sound, and they shift no debt burden nor any tax burdens to future generations. In 2013 or 2023, we will deal with the economic and social problems facing us with the resources at our disposal at that time–the labor and capital needed to produce food or medical care or automobiles or, as some may prefer, weapons of mass destruction. The size of the national debt, or the Social Security Trust Fund which consists of U.S. government bonds, will have very little, if any, effect on this–the basic question of resource allocation in our society, what we produce and who gets it.


Thus, the Bush deficits are not “fiscally irresponsible.” Calling them that allows Democrats and Republicans to carry on a reactionary debate between debt cutters and tax cutters, and to dodge the real issue–that the President’s budget is a social and political atrocity.


Big spending increases go to the military and “homeland security,” but little new money to anything else. Education, Housing and Urban Development, the Environmental Protection Agency, and Transportation receive increases of 1 percent or less, not enough to keep up with inflation. Actual cutbacks are imposed upon International Assistance, Amtrak, rural development, family literacy and vocational education, public housing revitalization, Medicaid, grants for municipalities to hire more police officers and administer juvenile justice programs, among scores of other items.


Are state and local governments facing the worst fiscal squeeze since World War II? Let ‘em eat cake–if they can afford it; they get no help at all from George W. Bush. The President ballyhooes his compassionate new spending to fight AIDS and HIV in Africa and the Caribbean–but his budget reduces, by the same amount, the funding that aides said would be sought for a separate development-aid initiative for poor nations. Totally eliminated is U.S. funding for a 1994 energy deal the Clinton administration negotiated with North Korea, a move likely to heighten tensions when Pyongyang may be resuming production of nuclear-weapons material in the face of an external threat–preemptive attack by the United States.


By contrast, the Pentagon gets $380 billion, an increase of 4.2 percent on top of last year’s whopping $36 billion increase, the biggest since the administration of Ronald Reagan, and a mere way station on the road to $484 billion by 2009, excluding costs of any war on Iraq (estimated at $50 and $200 billion, more in the case of extended occupation and rebuilding). This is half the true measure of Mr. Bush’s budget; the matching half is the first round of fat tax cuts for the super-rich.


The Democrats’ conservative fiscal policy was engineered by–can you guess?–Bill Clinton, when he negotiated the Great Budget Compromise of July 1997, to balance the budget and trim taxes at the same time. In return for another set of tax cuts (reductions in capital gains and estate taxes, new tax credits for children) and “spending caps” to hold the line on federal expenditures, Clinton vowed to put the emerging budget surpluses into a “lockbox,” to “save Social Security first” and pay down the national debt. Many liberals cheered Clinton’s slick maneuver, designed to block the Republicans’ tax-cutting frenzy and stop them from handing more tax cuts to rich households. Too clever by more than half: by locking away trillions of tax dollars, Clinton also scuttled any plans Democrats might have had of using the surpluses for domestic social spending.


The Bush budget ushers in round 2 of Reaganomics: Republican administrations push through tax cuts to starve the federal government of resources, except for the military and its providential new sibling, the “war on terrorism.” Large deficits are inevitable, and perfect for Republicans, who seize upon them as proof that the only way to bring the budget back into balance is to cut government spending to the bone–social spending, of course–and then pulverize the bone.


It works like a charm. If and when budget surpluses do appear, as they did in the late 1990s, Republicans barely need to shift gears; now they can argue that there’s no way “your money” should pile up in the hands of the government, so it’s time to cut taxes again. And Democrats are left whimpering about their broken “lockbox,” and protesting that the tax cuts are “for the rich” (they are) and that the new round of deficits will “mortgage the future of our children” (they won’t). President Bush had the jump on them all along. In August 2001, when the government’s surplus was beginning to dwindle, Bush called it “incredibly positive news” because it will “create a fiscal strait-jacket for Congress.” All “nonessential” government spending must be chopped . . . to help make way for new tax cuts.


A $304 billion deficit would be exceedingly small if it were spent on social and economic reform–starting with a national health insurance program to cover everyone from birth to death. The best way to start paying for it would be to slash U.S. military spending–which would also be the greatest single step toward assuring peace and security for all the world’s people, including ourselves. A theme to promote in the demonstrations against another Bush war, sure to come.

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