Why the Deficit Is No Political Bomb


During the last days of his campaign for the Democratic Presidential nomination, Representative Richard A. Gephardt (D-Mo.) pilloried President Bush for running up the federal deficit. "We don't need a President who jawbones foreign governments about their economic policies, while he plunges us into the highest level of debt and deficit in our history," Gephardt said during a speech on Jan. 13 at the Council on Foreign Relations in New York.

Given the stunning runup in federal spending under Bush, you'd think this would be a winning issue for the Democrats this year. Well, look what it did for Gephardt, his candidacy now a victim of a worse-than-expected performance in the Iowa caucuses. He may have a point in his overall assessment, but it did nothing to advance his candidacy.

SURPRISING SUPPORT. The soaring deficit is a trickier issue than it might seem at first glance. For one thing, any Bush rival who points to the problem better have a plan of his own for bringing the deficit under control. More important, economists disagree among themselves about just how serious of a problem a rising deficit really is. While everyone agrees that the deficit's current growth rate is unsustainable, some believe the red ink will begin to subside next year as federal spending levels off following the election and the cost of maintaining U.S. troops in Iraq drops as more authority is turned over to the Iraqis.

If the economy continues to improve and tax revenues begin to rise again, the deficit as a percentage of gross domestic product will likely start to shrink. That percentage is the true barometer of how dangerous deficits really are, most economists agree.

In fairness to Bush's critics, this is hardly just a matter of political opportunism. The deficit has raised hackles across the political spectrum. The President's track record on fiscal matters has drawn sharp criticism from an unusual source: researchers Veronique de Rugy and Tad DeHaven of the Cato Institute, a Libertarian think tank that has mostly aligned itself with the White House on many issues.

DOUBLE TROUBLE. They noted last August that nondefense discretionary spending rose 12.2% in 2002 and was expected to rise 12.7% in 2003. Citing that study, conservative Weblogger Andrew Sullivan has sounded the alarm over the Administration's deficit spending, warning that "the current deficits are nothing compared to what's coming." And the prospect of adding increased space exploration to the fiscal agenda practically put him in orbit.

Let's take the view from above, though. Alarm bells went off during the Reagan/Bush I Presidential era, when the deficit inched toward 5% of GDP -- widely accepted as the beginning of the red zone for deficit spending that's dangerous to the economy. The deficit peaked in 1992, at around 5% of GDP, says Standard & Poors chief economist David Wyss.

Now flash forward to today: True, the deficit more than doubled to $374 billion in 2003, up from $158 billion in 2001, according to the latest data from the U.S. Treasury. And the Congressional Budget Office expects the deficit to rise to $480 billion in 2004. That's would be "highest level of debt and deficit in our history" in nominal terms, as Gephardt rightly pointed out. But it would be only about 4% of today's GDP, Wyss points out.

BYE, BYE BOOMERS.What's more, projections for future growth are falling. Wyss originally expected the deficit to hit $500 billion in 2004. Now he see it hitting $450 billion. And thanks to an economic pickup, which will generate more tax revenue, the CBO expects the deficit to drop to $341 billion in 2005 and to $225 billion in 2006.

These projections could be wrong -- and frequently are. It's hard to know what the economy will do even a year or two in the future. The numbers assume that the rise in discretionary spending will be stopped. If the projections are wrong, the result could be a huge drag on investment and economic growth, as public debt diverts dollars from private enterprise, driving up interest rates. And some economists such as Wyss worry that the deficit will be exacerbated by the retirement of baby boomers, starting in 2010.

For now, though, forecasts that the deficit will swamp the fiscal ship of state aren't as certain as Democrats might wish. No wonder they aren't following Gephardt's lead. Steve Rosenbush


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