The Economist has
weighed in with a piece about the long-term effects of the U.S. deficit.
Look closely, and Mr Bush is also much less of a tax reformer than Mr Reagan was. In 1986, the Gipper presided over the biggest tax reform in modern American history. The tax base was broadened and rates were lowered, but the overall tax burden remained unchanged. Although Team Bush wants a reformed tax code, aimed at consumption rather than income, their strategy of tax reform via tax cuts will not produce a clean reform. Many of the subsidies and loopholes of the current system will remain. The result will be a narrower tax base, full of distortions, which shifts the burden of taxation towards poorer Americans.
The other big difference with the Gipper is that Mr Reagan was not averse to putting up taxes when too much red ink appeared. Taxes were raised several times during his presidency. Congressional rules on deficit reduction were introduced during Mr Reagan's second term. So far, at least, Team Bush has shown no such flexibility. There is no admission that America faces a fiscal mess, and no shifting from the mantra that all tax increases, at all times, are bad.
The real reason to fret about America's fiscal outlook is that this self-delusion shows little sign of changing. The Democratic presidential candidates are just as keen to spill red ink as Mr Bush, though on different priorities. They would roll back some or all of the tax cuts, but then go on to spend much, or all, of the recouped revenues on health care. The real debate in Washington is still about where to direct the red ink, rather than how to reduce it.
At some point, however, both Mr Bush and the rest of Washington will be forced to leave this fiscal Neverland. When will that be? Many look to the late 1980s and early 1990s as a model. Then, years of persistent fiscal deficits persuaded Americans that belt-tightening was necessary. Budget rules were introduced, spending was cut and taxes were raised. It was politically painful (particularly for George Bush senior, who thereby lost the 1992 election). But the tide of red ink was turned.
This time the turnaround will be much tougher. There will be no “peace dividend” from the end of the cold war (indeed, the pressure on military spending may continue to increase). America is unlikely to see another stockmarket bubble, with its surge in tax revenues. As baby-boomers retire, the pressure from entitlement spending will be more acute. Set against this background, the path back to a sustainable fiscal policy will be extremely painful, even without any dramatic fiscal crisis. Long after Dubya is back on his ranch, Americans will be trying to recover from the mess he created.
The nine Democratic contenders for the nomination have a position on the deficit that, tightly condensed, argues in favor of repealing most or all of the Bush tax cuts and investing the resulting revenue in programs that create jobs that, in turn, lead to a more robust economy that, in turn, provides more government revenue to keep deficits under control. Some candidates are, obviously, more specific and detailed than others.
As for Bush, his short-term objective is to ignore the deficit while continuing to shift an ever-increasing tax burden onto wages. This has the double whammy of providing more immediate benefits to the wealthiest 20% of the population (because a fair chunk of their income comes from sources other than wages) and keeps many “middle-income” Americans upset that their own tax burden is so high, thus contributing to political support for additional tax cuts down the road. In the long term, the Bush package, its advocates hope, will grow the deficit so large that Grover Norquist & Pals will obtain their cherished desire for a bathtub drowning of federal programs because this will be seen as the only way to escape the ocean of red ink.
What should the Democrats do? Wes Clark, for instance, argues, in traditional Keynesian fashion, that short-term deficits in a recession are nothing to worry about. It’s the long-term deficits (and accumulating debt) that should be the focus of any ameliorative government efforts.
Is he right? Does Dean or Edwards or Kerry have a better idea? If a Democrat actually is elected 12 months from now, what should he or she do to fix federal finances?