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By Michael Mandel We've heard a lot about faith and moral values of late. But faith, or lack of it, plays a critical role in the debate over economic policy as well. On one side are the economic optimists, who believe that our children will be better off than we are; that new technologies can deal with such seemingly intractable problems as high health-care costs, energy shortages, and global warming; and that growth will be fast enough to reduce poverty.
On the other side are the economic pessimists, who have far less faith in the future. They fear that slow growth will make the next generation worse off than today's; that new medical technologies will just raise costs; and that redistribution of income, rather than growth, will be the only reliable way to improve the lot of the poor.
WHAT DEFICIT?. In my view, the Republican Party has aggressively positioned itself as the party of economic optimism. In both policy and rhetoric, Republicans have demonstrated a stronger belief in progress and our economic future than the Democrats. The political import is clear: The Republicans have cornered the market on both religious and economic faith, and it proved to be an unbeatable coalition. Unless Democrats shake off their pessimism and renew their faith in technological progress, they are doomed to wander in the wilderness as lost souls.
To understand the depths of the problem, let's start with the attitude of the respective parties toward budget deficits. Ever since Ronald Reagan signed his big tax cut into law in August, 1981, opposition to budget deficits has been the centerpiece of Democratic economic policy. Walter Mondale, the Democratic Presidential candidate in 1984, based his campaign on attacking Reagan's budget deficits, calling them "appalling," "obscene," and "a trapdoor under our economy," and promising to raise taxes if elected.
Bill Clinton made cutting the budget deficit the key achievement of his first term. Gore promised to do the same in 2000. And this year, John Kerry called the budget deficit a "fiscal cancer."
MINOR IMPACT. One has to wonder why the Democrats have been so fixated on the budget deficit for more than 20 years. After all, they have only one President to show for this fiscal righteousness. And their antideficit stance has been not only unsuccessful politically, but it's unsupported by the economic evidence. In the quarter-century since 1980, U.S. budget deficits have averaged almost 3% of gross domestic product. Guess what? During that period, the U.S. economy grew at a 3.1% pace, faster than any other major industrialized country's.
Even in the 1980s, when the U.S. budget deficits averaged 4% of GDP, the country's average annual growth rate was 3.3%, exceeded only by Japan's. That doesn't sound like a record of economic failure.
Moreover, even pro-Democratic economists are forced to agree that budget deficits, at today's level of about 3.5% of GDP, are only a minor drag on growth, taking just one-tenth or two-tenths of a percentage point off the long-term growth rate. For example, the Brookings Institution, which is generally known as a Democratic think tank, has repeatedly castigated the Bush Administration for its big deficits. But buried deep within a September, 2004, paper from Brookings economists William Gale and Peter Orszag is a telling admission: An average budget deficit of 3.5% of GDP over the next 10 years "will reduce national income by 1 to 2 percent in 2015." That's equivalent to cutting one-tenth to two-tenths of a percent off the 10-year growth rate. (For those masochists who want to look up the result themselves, it's on page 34 of the paper.)
INCOME TRENDS. If the long-term growth rate is expected to be 4%, then running big budget deficits will only cut it down to 3.9% or 3.8%. Is this difference big enough to build a political party around?
The Democrats' hostility toward budget deficits and their insistence on being the Hair-Shirt Party only makes economic sense if coupled with a pessimistic view of the future. If you expect future growth to be slow, then the next generation of Americans will have relatively low incomes and will struggle to pay back the accumulated debt.
But in an optimistic view of the future, our children are going to be considerably richer than we are. Over the past 10 years, real disposable income per person has risen by roughly 25%. If these trends continue, then 35 years from now the average person will have disposable income of about $60,000, in today's dollars, more than double today's figure of $29,000. In such a world, building up the national debt would be far more tolerable.
LIMITS ON R&D. The economic pessimism of the Democrats and their focus on the budget deficit carries real policy consequences. Bill Clinton's first term as President is counted as a triumph by Democrats because he was able to bring down the deficit. Yet to do so, he had to hold down critical long-term investments, such as research and development as well as spending on education. In Clinton's first four years, non-defense R&D, adjusted for inflation, only rose by 1.9%, while education and training spending actually fell.
Investing for the Future
Percentage change in real federal spending*
Clinton, first term
Clinton, both terms
Bush, first term
Nondefense research and development
Education and training
*fiscal yearsData: Office of Management and Budget
When they had control of the White House, Democrats behaved as if they had given up faith in progress, tightening the collective belt rather than investing for the future. It's likely that John Kerry, if he had been elected, would have been forced to make many of the same choices in order to fulfill his promise to cut the budget deficit.
George W. Bush, in his budget choices, showed far more optimism and faith in progress. In his first term in office, he'll have boosted real spending on non-defense research and development and education and training by 38% and 29%, respectively, more than in Clinton's entire eight years. That's based on estimates from the Office of Management and Budget.
OPTIMISM-CHALLENGED. In rhetoric, too, Democrats have been much more pessimistic about the economy. Kerry's speeches, of course, focused on the bad state of American workers. More surprisingly, when Al Gore accepted the Presidential nomination at the Democratic convention in 2000, he barely mentioned the New Economy boom, choosing to devote most of his speech to all the things that were wrong with the economy.
And in his first Presidential debate against Bush, the first two policy proposals that Gore advocated were running a balanced budget every year and paying down the national debt. Gore did not even mention the word "growth" during the debate, instead emphasizing the negative: "Too many people have been left behind," he said.
In focusing on the negative, Kerry, like Gore before him, gave up the opportunity to run on the idea of technology and progress. Indeed, the Democrats have all but abandoned optimism to the GOP, allowing Republicans to proclaim themselves the champion of not just faith but growth. This proved to be a fatal mistake for the Democrats in a year when the Republican voting base was energized largely by moral values and religion.
WHICH TENT? Now, Democrats may say that they had no choice, that the polls told them that their best chance for defeating Bush was to play on the economic dissatisfaction of voters in the swing states. But this argument misses the larger historical point. The two great driving forces of Western civilization today are technology and religion -- or, if you will, faith in progress and faith in God. Sometimes technology and religion work smoothly together. Sometimes, as in the case of stem-cell research, they are sharply opposed. (Indeed, the greatest achievement of the Republican Party in recent years may be their ability to keep both the pro-progress and pro-religion types under the same tent.)
Nevertheless, Democrats cannot afford to concede both driving forces to the Republicans. If they have to choose one or the other, Democrats will likely find it easier and more productive to embrace technology and position themselves as the party of progress. That is their best hope for making themselves relevant for the future. Mandel is chief economist for BusinessWeek