Deficit Disorder
    By Dean Baker
    t r u t h o u t | Perspective

    Thursday 20 July 2006

    Last week, President Bush put on a silly charade in which he boasted that better than expected revenue numbers for 2006 vindicated his tax cuts. As many news stories eventually pointed out (after first buying the charade), better than expected tax collections were largely a fluke resulting from an unusually strong stock market performance last year. No one, not even the Bush administration's own economists, is predicting that this uptick in tax revenues will be sustained. Claiming that a one-year upturn in tax revenue proves the success of the tax cuts is like arguing that global warming is not a problem based on a weeklong cold spell.

    Unfortunately, the nonsense with the deficit does not end with Bush. Many of the Democrats have been anxious to argue that the Bush deficits have put the country on the road to bankruptcy. The Bush deficits are large - too large - but they are not especially large by historical standards, and running deficits of this size for a few years will not be disastrous for the economy.

    As every economist knows, the deficit must be measured relative to the size of the economy in order to assess its impact. The $296 billion deficit currently projected for 2006 can sound scary (most of us will never see $296 billion), but it comes to just 2.3 percent of GDP. The deficit was larger than 2.2 percent of GDP every year from 1980 to 1995. At its post-war peak in 1983, the deficit hit 6.0 percent of GDP. So, we don't have to be too alarmed about the size of the current deficit. The roof is not about to come crashing down.

    Unfortunately, this is not quite the whole story. The deficit numbers most often reported don't include $174 billion that the federal government borrowed from Social Security. Reporters like to use the Social Security surplus to hide the true size of the budget deficit. (It is sometimes claimed that politicians use the Social Security surplus to hide the size of the budget deficit. This is not true. Reporters and their editors determine which deficit numbers appear in the news, not politicians.) An accurate measure of the budget deficit must include the money borrowed from Social Security, since this debt must also be repaid under the law.

    Adding in the money borrowed from Social Security raises the 2006 deficit to $470 billion, or 3.7 percent of GDP. This should be cause for concern, but again not quite catastrophic. Over the period from 1982 to 1994, the deficit was smaller only in 1987, when it came in at 3.6 percent of GDP. To steal an old line, a deficit of this size is like termites. Termites can't destroy your house immediately, in the way that a fire can, but if you let the problem fester long enough, then the house will collapse. Similarly, it is not a disaster that we have a large budget deficit in 2006, or even 2007 and 2008, but if we run deficits of this large for a long enough period of time, it will reduce economic growth and lead to substantially larger future tax burdens.

    That may sound somewhat less impressive than yelling "fire" over the budget deficit, but it is important that we keep our heads on this issue. The country faces many needs, like providing decent health care to all its citizens and ensuring a basic standard of living to the working poor. If the Bush crew ever loses power, there will be a push to address these needs. While taking back the tax cuts to the rich will provide a substantial pot of money, as will ending the war in Iraq, these sums will not be sufficient to both meet the country's needs and balance the federal budget.

    Any future Democratic administration will therefore be faced with a fundamental choice as to whether it concentrates on balancing the budget or meeting the country's needs. If progressives have been praying to the god of balanced budgets, then there will be no one to lead the charge for focusing on the nation's unmet social needs.

    So, the moral of the story is that Bush deserves criticism over his tax cuts for the rich and his excessive budget deficits. But, we should not dig ourselves into a hole with these criticisms. Deficits do not mean disaster. Running a modest deficit to achieve important social goals is more responsible than balancing a budget to keep the accountants happy.

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