Deficit politics

Bruce Bartlett
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Posted: Nov 11, 2003 12:00 AM

The recent announcements that the economy grew an astonishing 7.2 percent in the 3rd quarter while adding 126,000 jobs in October are necessitating a change in strategy by Democrats.  Up until now, their mantra has been that Republicans gave us the worst economy since the Great Depression, or whatever their hyperbole of the day is.  But with growth restored, jobs rising and the likelihood that this trend will continue through the election, Democrats have to find something else to complain about.

 I believe that they will quickly turn their full attention to the budget deficit.  They have had to be restrained about this up until now, trying to finesse the issue by attacking long-term deficits, while approving short-term deficits due to the slow economy.  However, they have gotten nowhere with this bifurcated strategy because it simply doesn't resonate with ordinary people.  To those who think deficits are bad, all deficits are bad.  Saying that some are bad and others are good just confuses the issue politically.

 But with growth and jobs returning, Democrats can unify their message.  Now they can say that deficits are the root of all evil, because they are no longer needed to tide us over an economic downturn.

 A key piece of ammunition for Democrats seeking to make deficits the key economic policy issue in next year's presidential campaign is the new book by former Clinton Treasury Secretary Robert Rubin, In an Uncertain World (Random House).  In an excerpt published in the Financial Times on Monday, Rubin gives the 1993 budget deal primary credit for the 1990s economic boom.

 Says Rubin, "The view over the next few years that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment, which in turn led to job creation, lower unemployment rates and increased productivity."

 In coming months, we can expect to hear Democrats and their mouthpieces in the media repeat this message over and over again.  The economic expansion cannot continue, they will argue, unless deficits are reduced sharply.  This will give them a much more politically palatable way of attacking Republican tax cuts than by calling them a give-away to the rich, which is all they have had to say for the last several years.  Now, raising taxes can be portrayed as fiscal responsibility instead of class warfare.

 Further contributing to the new Democratic line are two factors.  First, interest rates are going to rise sharply in coming months as businesses borrow for expansion, prices begin rising from low recessionary levels, and the rate of return to capital goes up.  The Federal Reserve may also be forced to raise short-term rates--something liberals will strongly encourage in order to slow the economy and make deficits more politically potent.  This strategy was signaled in the New York Times' lead editorial on Nov. 9.

 Second, Howard Dean's decision to forego matching funds probably means that whomever gets the Democratic presidential nomination will do the same thing.  This means that the Democratic candidate will have to expand his fundraising base beyond Hollywood and labor unions.  He must appeal to Wall Street and the business community in order to raise enough campaign money.  Deficit reduction will be attractive to this audience.

 If this plan is successful, it could lead Republicans into the trap of doing some kind of major deficit reduction before the election.  But to be meaningful, such a package would have to include tax increases and cuts in Medicare, especially if defense is off the table.  This will open the door for Democrats to scare seniors and demoralize the Republican base, as George H.W. Bush's 1990 budget deal did, which lead to the election of Bill Clinton in 1992.

 Republicans need to be aware of what is happening and prepare themselves to respond to the deficit argument.  Unfortunately, they cannot make the case that they have tried to limit the size of government, but were stymied by Democrats.  First, they haven't even attempted to limit spending.  Second, Republican control of Congress gives them no excuse.

 Ironically, one ally Republicans may find is Bill's Clinton's top economist, George Stiglitz.  In his new book, The Roaring Nineties (Norton), he throws cold water on the idea that the 1993 budget deal brought interest rates down and sparked economic growth.  "Interest rates would have fallen anyway," he writes.  And growth was mainly due to technological innovation, increased international competition, reduced inflation and other factors unrelated to the budget.

 I think President Bush is smart enough not to fall into the trap Democrats are setting.  As long as growth remains solid and jobs continue to increase, he will likely win reelection.  But after the election, deficit reduction will become a high White House priority.