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The publication of Robert E. Rubin's book, In An Uncertain World, is an opportunity to examine a key policy debate roiling the country since Ronald Reagan became President: Do budget deficits matter? The argument pits an unusual alliance of the Right and Left against the middle, with Republican supply-siders and liberal Democrats in favor of deficits and moderates of both parties against them. The deep tax cuts promoted by President George W. Bush, projected multitrillion-dollar budget deficits, and the health of the rebounding economy make the great deficit debate critical.
It is, of course, all about growth. Rubin argues that income tax increases under President Bill Clinton moved the budget into surplus, cut interest rates, and boosted corporate investment. The result? Eight years of solid growth, rising productivity, record low unemployment, and new highs for stock prices. Supply-siders who predicted disaster when taxes went up were proved wrong, Rubin says.
Not so, say the supply-siders. When taxes were cut under Reagan in the '80s, the deficit rose sharply, yet rates fell and growth was as strong as in the '90s. Foreigners financed the deficit. Today, the White House is making the same argument.
So, do deficits matter? It depends. First, the business cycle makes a difference. In times of recession, all budget deficits are Keynesian. Temporary tax cuts that increase available income make fiscal sense. In times of strong expansion, a big deficit could spell trouble. Whether deficits matter also depends on what people want from government. Three-quarters of all federal spending goes to Social Security, Medicare, defense, education, farm subsidies, highways, parks, and interest payments on the debt. Polls show most Americans are against "government spending" but strongly back these programs. Right now, no one is paying fully for them and the resulting deficit is long-term and structural. It gets much worse when 75 million baby boomers begin to retire.
The pro-deficit factions on both the Left and the Right assure us that economic growth will pay the bill. Liberals argue that more government spending on education and research and development will boost innovation and productivity. Conservatives say that lower taxes will increase incentives and investment. Yes, technology, risk-taking, and investment all play key roles in promoting growth. Yet no reasonable estimate of future growth is likely to pay for America's long-term deficit. Some supply-siders acknowledge this. Under Reagan, they said that tax cuts would pay for themselves. Under Bush, the supply-side head of the Congressional Budget Office agrees that's impossible.
A pragmatic, non-ideological view of the deficit debate would conclude that huge, long-term structural deficits put America's prosperity in harm's way. Maybe China and Japan will finance U.S. budget deficits. Maybe not. Maybe inflation will stay low. Maybe not. Maybe the boomers' kids and grandkids will pay for their retirement. Maybe not.
It would be far better to get the deficit under control. Means-testing entitlements, cutting farm subsidies, and sharing the Iraq burden internationally would start reigning in government spending. Restoring some tax revenues to pay for what Americans demand from their government is also the responsible thing to do. The clock is ticking on the deficit. Time is running out for ideology from the Left or the Right.