Bush well on way to meeting deficit promise
By Michael Barone - US NEWS
So the deficit—the federal budget deficit—is declining sharply, more sharply than just about anyone in mainstream media anticipated. According to figures from the Office of Management and Budget, the deficit is projected to decline from $412 billion in 2004 to $333 billion in 2005, a 19 percent decline. OMB further projects, obviously with less certitude, that it will decline to $162 billion in 2008.
If so, that will mean that George W. Bush will have more than kept his promise to cut the deficit in half in his second term. Back in February, OMB projected a 2005 deficit of $427 billion.
"The change from February's projection," writes Jonathan Weisman in the July 14 Washington Post, "is dramatic."
Dramatic, perhaps; but it should not have been so entirely unexpected. The experience of the past 15 years is that budget deficits—and surpluses—can oscillate wildly. The budget deficit is after all the product of two independent variables—federal outlays on the one hand and federal receipts on the other. Both can change sharply, and sometimes do. The table in the Economic Report of the President 2005 shows the numbers.
The deficit stood at $255 billion in fiscal 1992 (the numbers here are all in current dollars and rounded off to the nearest billion). In 1995, the new Republican majority in the House tried to pass a constitutional amendment requiring a balanced budget; President Bill Clinton opposed it and refused to commit to budget plans to reduce the deficit to zero. Nonetheless, outlays rose only slightly as a result of budgets and appropriations passed by the Republican Congress, after great controversy, and the deficit fell to $107 billion in 1996 and $22 billion in 1997. In that last year Clinton and Republican congressional leaders agreed on a budget deal that resulted in surpluses of $69 billion in 1998, $125 billion in 1999, $236 billion in 2000, and $128 billion in 2001.
Back in 1992, when Ross Perot was running for president and decrying the deficit, it was widely thought that big deficits were eternal. In retrospect that seems like nonsense. In retrospect, the 1992 deficit of $255 billion was eliminated by three things. One of those was inevitable: the ending of the savings and loan problem. For several years there were outlays in the tens of billions to pay off S&L depositors. In time they were all paid off, and the government started raking in receipts from the sale of S&L assets. So a large part, perhaps one third, of the deficit was going to disappear whoever was in office.
Democrats argue that increased receipts from the 1993 Clinton-Democratic Congress tax receipts further cut the deficit. Receipts did increase by about $100 billion in each fiscal year from 1994 to 1999, and some of this increase was due to the higher taxes on high-income taxpayers imposed by the Democrats. So give them credit for eliminating about one-third of the 1992 deficit. Credit for eliminating the other one third should go to the Republican Congress, which held down increases in outlays $41 to $51 billion in fiscal years 1996 to 1999.
Much of the debate in the 2000 presidential campaign came over what to do with the surplus: Al Gore wanted to spend some of the money on programs and, astonishingly, to pay off the national debt (Alexander Hamilton's lessons on the need to maintain a national debt apparently having been forgotten); George W. Bush wanted to cut taxes. Bush won and cut taxes; the September 11 attacks exacerbated a mild recession and produced far higher outlays on defense and homeland security; the Republican Congress (with Democrats in the majority in the Senate for 18 months) exercised much less fiscal discipline than it had when Clinton was president. The 2001 surplus of $128 billion turned into deficits of $158 billion in 2002, $378 billion in 2003 and $412 billion in 2004.
In my own political migration from left to right, I have retained the same views on several issues: immigration (generally in favor), the general thrust of foreign policy (America is a force for good in the world), and federal budget deficits (they don't much matter). I noticed that the deficits of the 1960s and of the 1980s produced in part by the Kennedy and Reagan tax cuts seemed to result in low-inflation economic growth. Every large organization carries debt and, as Hamilton understood, should do so, in order to maintain its capacity to borrow: If the federal government has debt, so does General Electric. The important question is not whether an organization has debt but whether it can service the debt at reasonable cost. There was an argument that debt service was getting too expensive for the federal government in the late 1980s and early 1990s, when budget deficits peaked at 6.0 percent of gross domestic product in 1983 and 4.7 percent in 1992 (although the deficits of the early 1990s, as noted, were inflated by the savings-and-loan crisis which was inherently temporary and nonrecurring). But the deficits in this decade were a much smaller share of GDP, peaking at 3.6 percent in 2004. The currently projected deficit of $333 billion for 2005 seems likely to be under 3 percent of GDP, a level at which the debt has proved readily serviceable over the years.
Why has the deficit declined so rapidly this year? The simple answer is that outlays seem to be increasing by about 7 percent but receipts seem to be increasing by about 15 percent. The Bush tax cuts, like the Reagan and Kennedy tax cuts, seem to be resulting in much more buoyant increases in receipts than the Clinton tax increases did: Just look at the numbers. The scoring system used by Congress and OMB in projecting revenues is static; that is, it assumes that tax increases and tax cuts have no impact on economic activity. But obviously they do: Tax increases reduce economic activity and tax cuts increase it. Conservatives have been calling for dynamic scoring—scoring that takes into account these effects—for years, in vain. They have been frustrated by the one intellectually serious argument against it, that no one knows exactly how much tax increases and tax cuts influence economic activity. Maybe that's a good argument. But observers, journalistic and otherwise, should not be so surprised when tax cuts result in a gusher of receipts, even if the economists can't tell us with certainty how big that gusher will be. And our recent history of deficits and surpluses should leave us unsurprised when a deficit level that everyone says will be eternal proves to be evanescent. Just use a little common sense.
A concluding note. Weisman's lead story in the Washington Post, a story about economic good news if there ever was one, carries this subhead, "Tax Cuts 'Working,' President Says, but Some Voice Caution." The Media Research Center has issued a study showing how the mainstream press treated good economic news in the Clinton years and in the Bush years.
Unsurprisingly, there was a big difference. Good economic news in the Clinton years was presented as good economic news. Good economic news in the Bush years was presented with caveats and warnings that it might not be so good. And this even though many of the basic numbers—GDP percentage increase, unemployment percentages—were almost identical in the two presidents' re-election years of 1996 and 2004. Intentional bias may not be at work here, just the bias that is inevitable in a mainstream press in which about 90 percent of the reporters and editors are Democrats. With a Democratic president in office, they are on the lookout for good news and present it lavishly; because they assume Democratic economic policies will be good for the country. With a Republican president in office, they are on the outlook for bad news; because they assume Republican economic policies will be bad for the country.
And if you're on the lookout for bad economic news, you can always find it. Robust economic growth might produce inflation; national economic recovery might not penetrate to every geographic region or demographic category; robust increases in stock prices or housing prices might prove to be an economic bubble. Thus Weisman and his editors, probably surprised by the decline in the federal budget deficit, nonetheless can find reasons why it might not be such good
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