Liberals are beside themselves. The so-called "structural" deficits that Paul Krugman and other left-wing economists have been fretting about are evaporating before their very eyes as a result of the Bush tax-rate reductions, which have ushered in a robust economic expansion. According to new data, the 2004 deficit will be slightly more than $400 billion this year, nearly $100 billion below estimates from earlier this year. That's what happens when you plug into the supply side of the economy.
Around the world there has been considerable hand-wringing over burgeoning budget deficits, especially during the last few years of slow economic growth. I have always maintained that we can grow our way out of deficits if we simply slow the growth of spending and lower tax rates to get the economy moving again. What is surprising is how quickly we forget the lessons of history, personal experience and common sense.
When Ronald Reagan passed across-the-board tax-rate reductions in 1981, Keynesian economists, including a few notable Nobel laureates, predicted "the engines of economic growth have shut down here, and they are likely to stay that way for years to come." These same economists, including many who were advising President Reagan, predicted rising deficits would lead to runaway inflation. They either forgot or never learned that inflation is here and everywhere a monetary phenomenon.
As a result of sound monetary policy and incentive-based tax-rate reductions, the engines of growth surged forward: Inflation dropped into the low single digits, unemployment dropped continuously, GDP doubled and tax revenues skyrocketed. We are seeing it happen again in the United States.
It can happen in Japan, as well, where there was a decade of lost economic growth due to "tax and spend" politicians trying to "stimulate" the economy with a host of stop-gap measures and public works projects. These fiscal policy errors were compounded by the equally dubious monetary policy of interest rate targeting, which had the perverse effect of lowering the interest rate to virtually zero without adding much needed liquidity. After a decade of malaise and poor economic policies, Japan is left with debt to GDP approaching 160 percent.
Today, Japan's economy has begun a nascent economic recovery, growing faster than 6 percent over the last two quarters. Yet in the face of this success, Keynesian witch doctors prescribe a 5 percent consumption tax to "solve the problem" of rising interests, a normal consequence of revived growth.