Bear Left!

Deficits Pending
Tim Francis-Wright

Republican lawmakers have been notable by their silence about the recent pronouncement by Mitch Daniels, the Director of Management and Budget, that the federal government will have budget deficits though 2004. During the last year of the Clinton administration, by contrast, the federal government ran a surplus, even without the built-in surplus of the Social Security system.

John Maynard Keynes was the economist who espoused government action to regulate the vicissitudes of the market. He advocated government spending or tax cuts in down times and fiscal restraint in up times. Republicans have rediscovered Keynes in recent years: they advocate tax cuts no matter what the season. The goals are twofold: to reward their constituencies in the short run and to cripple the government in the long run. The Democrats should have been prepared, because the Republicans had the same game plan during the last stretch that they ran the White House.

As the Center for Budget and Policy Priorities noted last month, the Bush tax cut is not solely responsible for the impending deficits. A recession that started earlier this year will affect not just this year's tax receipts, but also receipts for many years forward. Increased spending on defense and homeland security also has both immediate and cumulative effects. While the recession could go unacknowledged, the Bush tax cut was an attempt to give the surplus back to the people. As the recession became more apparent, it became an economic stimulus package.

Republican Presidents since Richard Nixon have sought to cut taxes for their natural constituency: wealthy Americans and they businesses that they control. Nixon sought to stimulate the economy by cutting corporate taxes. Reagan and Bush the Elder sought to stimulate the economy by slashing taxes on the rich. Now, Bush the Younger has a ten-year tax cut, designed to give back part of a series of surpluses to taxpayers, particularly wealthy ones.

The Republican affinity for tax cuts does not simply reward the affluent for voting Republican. If taxes are cut enough, or if spending increases as taxes are cut, then the federal government operates in a deficit. And deficit spending in the long run shrinks the size of government. This side effect is just what some Republicans in Congress want. Federal budget deficits mean that larger fractions of the government's annual budget is not just difficult, but impossible to cut. Military spending, for example, is particularly resilient, thanks in large part to the difficulty of closing bases to save on personnel costs. But even military spending is easy to cut compared to cutting spending on interest. The government must pay the interest on its debts before it does anything else. The higher the interest cost to the government, the less money that is available for anything else that the government tries to do, without raising taxes.

How the government comes to borrow is particularly telling. The Democratic administrations of Roosevelt, Kennedy, and Johnson incurred deficits in order to fight wars, or to enact wide-ranging social programs, or both. In the 1980s, the Republicans discovered that running record deficits in peacetime was not a liability at re-election. Presidents Reagan and Bush dramatically increased military spending and cut tax rates for the wealthy far below where they were previously. The tax cuts affected not only the top tax rates but also the rates paid on capital gains, most of which the affluent receive.

The tax cut passed earlier this year echoes in no small part the 1981 Reagan tax cut. Bush cut marginal tax rates on the upper three tax brackets, and even eliminated the estate tax over time. (The cut would not benefit most Americans, because even the current system exempts the first $1,000,000 of an estate.) If the tax cuts were designed to create short-term deficits in order to stimulate the economy, then the debate would be about the best method of stimulation for the economy. But the vast majority of the tax cuts—except for a modest rebate of 2000 tax payments—have yet to take effect. Their real toll is in the long term.

One of the most ironic features of the 1990s is that the Democratic Party became the party of fiscal conservatism. Despite traditional Republican claims that they were a "tax-and-spend" party, it balanced the budget and even applied the surplus in 2000 towards redeeming part of the public debt. By contrast, the Republican party was a "borrow-and-spend" party during its tenure from 1981 through 1993. The tax cuts of 1981 were aimed at the rich, and certainly did benefit the rich, but they also started a string of huge budget deficits. It took the Clinton administration seven years of economic expansion to get the budget of the federal government (excluding Social Security) into surplus. Many proposed Democratic programs, like universal health care, died on the altar of getting the budget back into balance.

The Democrats under Clinton did such a good job with the budget deficit that long-term interest rates fell dramatically from 1993 to 2001. As bonds became less lucrative for investors, the stock market became more attractive. Economic expansion, low interest rates, and rising stock prices became intermingled and interdependent. But the Democratic Party was afraid to play rough when times were good. Running surpluses and retiring debt were cautious, prudent actions. By giving Bush the Younger a budget surplus, Democrats gave the Republicans an opportunity to revisit the Reagan play book and cut taxes once again. When the economy headed south earlier this year, the tax cut finished off a quadrennium of surpluses altogether.

It should come as no surprise that deficits are back under the Republicans, although it is surely bad luck for the deficits to be back so soon. The 2001 tax cuts were a no-lose proposition for the Republican Party. If the tax cuts did not eat up all of the budget surplus, there would be tax cuts yet to come, for capital gains taxes and for corporations. If they did eat up all of the surplus, then there might still be tax cuts yet to come. It is important to remember that the deficit is not just a number, but also a weapon against future Democratic administrations.