Deficits balloon quickly under Bush

In 2001, a newly elected Bush, with the acquiescence of Congress, enacted a 10-year tax cut package featuring modest reductions initially, but dramatically deep cuts in later years. The taxes that came under the sword were the ones that conservative pundits found the most odious — top marginal income tax rates, capital gains taxes and estate taxes.

Many Democrats went along. After all, the fiscal position looked impregnable. Years of budget surpluses stretched languidly ahead. With tax revenues gushing into the Treasury’s coffers, it was just a matter of time before the government paid off its national debt. The Treasury, anticipating the salubrious situation to continue well into the future, announced it would no longer issue 30-year bonds.

What a difference

How quaint it all seems now. In less than two years, the budget picture has turned decidedly bleak. Gone are the prospects of surpluses; now, in their stead, deficits rule the roost. This year’s deficit is likely to be a record $304 billion.

The reasons for the return of the budget deficit are not difficult to ascertain. First, there were the tax cuts which drained the Treasury of revenues. Second, government spending rose as the imperatives of dealing with terrorism asserted themselves. Third, the economy descended into recession, the concomitant decline in economic activity leading to a further decrease in tax revenues. And, fourth, the plunging stock market caused hitherto strong capital gains to evaporate, depriving the government of taxes on capital gains.

Amid this sea of fiscal gloom, Bush now proposes to widen the deficit appreciably — and enlarge the national debt. His tax cutting ardor, redolent to supply-siders of President Reagan’s zeal two decades ago, is undimmed by the specter of spiraling deficits — they are, claim his advisers, largely inconsequential. And, in any case, they hasten to add, theperilous state of the economy practically demands expansionary fiscal measures, and if deficits are the result, so be it.

Are they right?

No easy answer

The answer, alas, is not clear-cut. Conventional economic wisdom, fashioned largely by the ideas of John Maynard Keynes, an economist who shot to fame during the Great Depression with his proposals to cure the economy of the periodic malaise that it finds itself in, notes the importance of stimulating aggregate demand in the economy through suitable government intervention — notably, tax cuts and expenditure increases.

The tax cuts championed by Bush, however, are unlikely to spur much consumer spending.

Reductions in the top marginal income tax rates and the elimination of taxes on dividends will leave the vast majority of taxpayers virtually untouched.

Now, however, with the annual trade deficit hovering around $400 billion, the dollar looking increasingly weak under the strains of a likely war in Iraq and foreign investors skittish about the U.S. economy, the likelihood of vast amounts of capital flowing annually into the U.S. looks imperiled. The return of the budget deficits, in that case, may prove more portentous.

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Sanjay Paul is associate professor of economics at Elizabethtown College. He lives in Hershey, Pa. E-mail him at columns@greenbaypressgazette.com.