"Mirror, mirror on the wall---who's the most stupid sandbox economist of
them all?" You're right, it is a four-letter word.
Reagan had to quickly backtrack---covered his increased taxes with the
euphemism "revenue enhancement". Bush never found a fiscal hole that he
didn't lust to dig deeper.
No matter how big the federal deficit may appear to be, the economy can
quickly grow its way out. That, anyway, is President Bush's claim. To
his coterie of supply-side enthusiasts, tax cuts are the equivalent of a
real perpetual motion machine. The faster you cut taxes, so the theory
goes, the more revenue the federal Treasury should receive as the
economy booms.
Considering what that theory did to the U.S. economy under Ronald
Reagan, it's the triumph of hope over experience. Reagan scrambled to
enact tax increases to ameliorate huge deficits.
Even as the current White House clings to the theory, a new report from
the Congressional Budget Office projects a $422-billion deficit this
year and $2.3 trillion over the next decade, even if the current tax
cuts, technically set to expire over the next few years, are not
extended. If they are, it projects a tab of $4.5 trillion. The $2.3
trillion is already higher than the office's previous estimate in March
because of increased spending by Congress, which is stuck with paying
for, among other things, prolonged wars in Iraq and Afghanistan.
In other words, this deficit, unlike previous ones, is not a blip, but a
structural one. To make it look as though the deficit actually were on
the mend, the administration is trumpeting the current record
$422-billion estimate as lower than its original, deliberately
overstated $445-billion prediction in July. It isn't as though Congress
is resisting. To disguise the true costs of many tax cuts, Congress
phases them out each year on paper, only to renew them in practice. Even
the CBO's $4.5-trillion deficit over 10 years is almost surely too
optimistic — it's based on the assumption that funding for domestic
programs will not rise faster than inflation and not keep pace with
population growth.
But couldn't domestic spending be reined in to help curb the deficit?
Not exactly. About 70% of spending increases since 2001 have been for
defense, homeland security and international affairs. Tax cuts account
for about 58% of the budget deficit in 2004. If Congress decided to
target areas like education and health, the most it could painfully
squeeze out would be a few billion.
Federal Reserve Chairman Alan Greenspan keeps warning that federal
profligacy will force interests rates higher to avert inflation. He
reminded Congress last week of Economics 101: higher interest rates
choke off economic growth and increase mortgage rates and unemployment.
To avoid this scenario, Congress would have to return to so-called "pay
as you go" rules in which spending increases are matched by tax hikes,
and tax cuts by lower spending.
Bush continues to peddle the illusion of costless tax cuts. If his cuts
are extended, even increased, it's small consolation that the myth that
they can pay for themselves will be shattered.