Investor's Business Daily
Deficit Delusion
Wednesday August 4, 7:00 pm ET
Investor's Business Daily
Budget: Of all the promises being made now on the campaign trail, John Kerry's claim that he'll erase the government's deficit is probably the most dishonest.
Why? Because the senator no doubt knows the $1.2 trillion or so in new spending that he has also proposed would cause the deficit to expand, not contract.
He also knows that many of the "cuts" he has identified to offset the new spending are highly popular programs, such as student loans and farm subsidies, that have politically powerful constituencies. As such, they are not likely to be made.
Still, Kerry vows to "halve" the red ink over the next four years. But projections show that, with normal economic growth, the deficit will shrink as a percentage of GDP all by itself. So whoever is president can cut it simply by keeping the economy on the move.
What really bothers us is the use of the deficit -- an accounting detail, nothing more -- as if it were a key economic indicator. By pretending that the deficit has such significance, Kerry can make all sorts of crazy claims.
He asserts, for example, that deficits run up since 2000 have killed jobs, and that balancing the budget will create them. Really? Then how did President Reagan, whose two terms included higher deficits, create more than 20 million jobs?
Another Kerry claim is that rising deficits push up interest rates and crowd out private investment, thus slowing economic growth. A number of recent studies have looked at this question and basically agree: For every percentage point in the rise of the deficit as a share of GDP, interest rates will go up two to three basis points.
A basis point, remember, is one-hundredth of one percentage point. So you have to increase the deficit by $100 billion just to move interest rates two-hundredths of a percent. That's nothing.
Despite all this, Kerry seems to think he has an effective political weapon. After all, the deficit's gone up under Bush -- due partly to spending he has failed to restrain but due mostly to the stock collapse and economic slowdown that began under President Clinton.
Kerry can also cite the deficit to justify things that actually expand government's reach, not reduce it. Like raising income taxes on "the rich" and capital gains taxes on everyone.
Let's stop kidding around. The deficit will shrink in the next few years no matter what. The focus in this campaign should be on issues -- economic and otherwise -- that really matter. |
