Byline: Bailey Morris-Eck
It seems only yesterday that the US economy was anticipating nothing but good times ahead. Then, as the Bush administration took office, the federal economy was flush with surpluses climbing toward $5.6 trillion ([euro]5.2 trillion) over 10 years, with similar numbers projected for state budgets. All things were possible. It was possible to spend, spend, spend on record tax cuts, on wars in Afghanistan and Iraq, on Medicare, education, other aspects of healthcare, not to mention the "compassionate conservative" agenda on which Bush the Younger plans to base his re-election campaign. However, that was yesterday. Today, we are talking about nothing but deficits for the decade ahead.As one who reviewed the Bush budget in early February and predicted huge structural budget deficits for the foreseeable future, it is tempting to say, "I told you so". The projections last week that the federal deficit could explode to $5.8 trillion by 2013, rather than decline as the Bush administration has estimated, have set the agenda for a new round of potentially nasty political debates over "good" versus "bad" deficits and whether, in fact, deficits really matter.
Ronald Reagan would have said No to the latter. As he embarked on a riverboat gamble of big tax cuts combined with a massive military build-up, his administration proclaimed that it was trickle-down economic growth that mattered. But that, too, was yesterday. We know the legacy of those policies - huge structural deficits of 5% to 6% of GDP respectively in the Reagan and Bush the Elder presidencies. This resulted in interest payments on the national debt that accounted for more than 15% of total government spending, an unsustainable course that took more than a decade to correct.
Will Bush the Younger provide more of the same? The administration's reaction to the latest projections of the politically independent Congressional Budget Office was predictably on-message. The Bush economic team was dispatched to proclaim with one voice that the projections were too speculative to be taken seriously, that they were based on faulty assumptions and that long-term projections were notoriously inaccurate.
The White House has its own projections of only "good" deficits that will peak at $475bn next year and fall to just $62bn in 2008. These "good" deficits of only 3% to 4% of GDP or less (with a few possible aberrant years) are easily affordable. Conversely, the Congressional Budget Office projects that the deficit would be at least $480bn next year and remain at over $500bn in 2008, continuing to rise sharply. In other words, the office foresees "bad" deficits stretching over a decade, sapping economic growth and prospects for a younger generation.
If we were just talking politics, it would be easy to rationalise the "good" deficit, "bad" deficit debate along partisan lines. But that is not the case. The office has based its estimates on cautious, even generous assumptions. It assumes, for example, that the recovering US economy will surge next year and retain solid growth for most of the decade. The biggest reason for the return to "bad" deficits is the cost of legislation or government spending that has been growing at a rate of 7. …