The Bush Budget:
Deficits Aren’t the Problem
by Richard Du Boff
Dissident Voice
February 11, 2003
President Bush
has sent to Congress his Budget for fiscal 2004 (starting in October), calling for $2.23 trillion in expenditures and a deficit of $304 billion,
compared to $159 billion of red ink last year and a surplus of $127 billion in
2001. For the President’s Budget Director, Mitch Daniels, this deficit is
"acceptable," because it amounts to only 2.7 percent of our gross
domestic product, half as much as the record peacetime deficits of the mid
1980s. The Senate Minority Leader, Democrat Tom Daschle of South Dakota,
replies that, with deficits of this size, we now have "the most fiscally
irresponsible administration in history."
Daniels is
right. A current deficit of $304 billion is reasonable in a stagnating
$10-trillion economy like ours, which needs more spending pumped into it from
any source. If private consumption and investment are marking time, as they
are, only government can do the job.
Since Bill
Clinton excluded what he called "the left" from his administration in
the 1990s, Democrats, in one of the great role reversals of American political
history, have become the party of balanced budgets and debt reduction.
Now it’s Democrats
who proclaim that budget deficits drive up interest rates and "crowd
out" private investment, as government borrowing competes with private
investment for a fixed supply of loanable funds. There certainly are times when
this can happen--when an economy is operating at or near full employment, with
no reserves of labor and industrial capacity to spare, but not during
recessions like the one from which we have yet to emerge. In some periods when
federal deficits swelled, interest rates even declined, as during the 1980s.
Rates have also fallen over the past 12 to 18 months, as the budget shifted
from surplus back into deficit.
And it’s the
Democrats who warn that deficits, which increase our national debt (the total
stock of U.S. government bonds issued to cover all annual deficits to date),
will leave future generations with a great "burden" and make it
impossible to "save" Social Security.
Nonsense.
Finance is a source of mystification for people across the political spectrum,
and the "burden" of the national debt on future generations is a
prime example. In fact, the burden of the national debt is practically zero.
The only possible burden comes from interest paid to holders of U.S. government
bonds. Some of the interest is paid to foreign bondholders and drains income
out of the country; most of it is paid to U.S. residents who are largely in the
wealthy class, forcing a redistribution of income from taxpayers toward the
rich. But both of these effects are small-scale, and any undesirable income redistribution
can be cancelled out by increasing taxes on those who can afford to pay,
including wealthy bondholders--although, to be sure, this is easier said than
done.
The real costs
of the national debt, overwhelmingly, are borne by those of us who live during
years when deficits occur, because they allow the government, by spending more
money, to shift resources from private to public uses. But if deficits pay for
the likes of education and health, rail and mass transit, national parks and
forests, and environmental protection, future generations will be better off,
not worse: public investments like these are more productive, and more
desirable, than a ton of private investment--remember the telecom-internet boom
of the 1990s?
Current
deficits, especially when unemployment is high and business investment lagging,
are fiscally sound, and they shift no debt burden nor any tax burdens to future
generations. In 2013 or 2023, we will deal with the economic and social
problems facing us with the resources at our disposal at that time--the labor
and capital needed to produce food or medical care or automobiles or, as some
may prefer, weapons of mass destruction. The size of the national debt, or the
Social Security Trust Fund which consists of U.S. government bonds, will have
very little, if any, effect on this--the basic question of resource allocation
in our society, what we produce and who gets it.
Thus, the Bush
deficits are not "fiscally irresponsible." Calling them that allows
Democrats and Republicans to carry on a reactionary debate between debt cutters
and tax cutters, and to dodge the real issue--that the President’s budget is a
social and political atrocity.
Big spending
increases go to the military and "homeland security," but little new
money to anything else. Education, Housing and Urban Development, the
Environmental Protection Agency, and Transportation receive increases of 1
percent or less, not enough to keep up with inflation. Actual cutbacks are
imposed upon International Assistance, Amtrak, rural development, family
literacy and vocational education, public housing revitalization, Medicaid,
grants for municipalities to hire more police officers and administer juvenile
justice programs, among scores of other items.
Are state and
local governments facing the worst fiscal squeeze since World War II? Let ‘em
eat cake--if they can afford it; they get no help at all from George W. Bush.
The President ballyhoos his compassionate new spending to fight AIDS and HIV in
Africa and the Caribbean--but his budget reduces, by the same amount, the
funding that aides said would be sought for a separate development-aid
initiative for poor nations. Totally eliminated is U.S. funding for a 1994
energy deal the Clinton administration negotiated with North Korea, a move
likely to heighten tensions when Pyongyang may be resuming production of
nuclear-weapons material in the face of an external threat--preemptive attack
by the United States.
By contrast, the
Pentagon gets $380 billion, an increase of 4.2 percent on top of last year’s
whopping $36 billion increase, the biggest since the administration of Ronald
Reagan, and a mere way station on the road to $484 billion by 2009, excluding
costs of any war on Iraq (estimated at $50 and $200 billion, more in the case of
extended occupation and rebuilding). This is half the true measure of Mr.
Bush’s budget; the matching half is the first round of fat tax cuts for the
super-rich.
The Democrats’
conservative fiscal policy was engineered by --can you guess? -- Bill Clinton,
when he negotiated the Great Budget Compromise of July 1997, to balance the
budget and trim taxes at the same time. In return for another set of tax cuts
(reductions in capital gains and estate taxes, new tax credits for children)
and "spending caps" to hold the line on federal expenditures, Clinton
vowed to put the emerging budget surpluses into a "lockbox," to
"save Social Security first" and pay down the national debt. Many
liberals cheered Clinton’s slick maneuver, designed to block the Republicans’ tax-cutting
frenzy and stop them from handing more tax cuts to rich households. Too clever
by more than half: by locking away trillions of tax dollars, Clinton also
scuttled any plans Democrats might have had of using the surpluses for domestic
social spending.
The Bush budget
ushers in round 2 of Reaganomics: Republican administrations push through tax
cuts to starve the federal government of resources, except for the military and
its providential new sibling, the "war on terrorism." Large deficits are inevitable, and perfect
for Republicans, who seize upon them as proof that the only way to bring the
budget back into balance is to cut government spending to the bone--social
spending, of course--and then pulverize the bone.
It works like a
charm. If and when budget surpluses do appear, as they did in the late 1990s,
Republicans barely need to shift gears; now they can argue that there’s no way
"your money" should pile up in the hands of the government, so it’s
time to cut taxes again. And Democrats are left whimpering about their broken
"lockbox," and protesting that the tax cuts are "for the
rich" (they are) and that the new round of deficits will "mortgage
the future of our children" (they won’t). President Bush had the jump on
them all along. In August 2001, when the government’s surplus was beginning to
dwindle, Bush called it "incredibly positive news" because it will
"create a fiscal strait-jacket for Congress." All
"nonessential" government spending must be chopped . . . to help make
way for new tax cuts.
A
$304 billion deficit would be exceedingly small if it were spent on social and
economic reform--starting with a national health insurance program to cover
everyone from birth to death. The best way to start paying for it would be to
slash U.S. military spending--which would also be the greatest single step
toward assuring peace and security for all the world’s people, including
ourselves. A theme to promote in the demonstrations against another Bush war,
sure to come.
Richard Du Boff is the author of Accumulation and Power: An
Economic History of the United States (M.E. Sharpe, 1989). He is Professor Emeritus of
Economics at Bryn Mawr College. Email: rduboff@brynmawr.edu