The media and all too many political elites, it seems, never learn. For at least 20 of the past 25 years, there has been constant hand-wringing over the federal budget deficit. Well, they're at it again. Headlines around the world last week decried the $413 billion fiscal 2004 deficit as a historic record. The International Monetary Fund, once again interfering in U.S. economic policy, has called on the United States to raise taxes. All of this is exacerbated by political demagoguery of the Kerry campaign saying taxes only need to be raised on the top 2 percent of income earners.
The problem with all of these "sky-is-falling" analyses of the budget deficit is that they assume we have no choice but to dramatically increase spending as a share of our economy during the next 50 years. The professional Chicken Littles at the Concord Coalition best illustrate this by howling that "with realistic assumptions but no change in policy, the federal debt will swell by a staggering $5 trillion in the next 10 years." That's true only if one assumes a priori that federal spending will break the 50-year trend of remaining at or below 20 percent of GDP and explode to grow dramatically to 30 percent and beyond by midcentury.
Budget deficits didn't bring the fiscal house crashing down in the 1980s or 1990s because Presidents Ronald Reagan (from the beginning) and Bill Clinton (eventually) made the right policy choices. Both presidents teamed up with bipartisan majorities in the Congress to cut tax rates, reform entitlement programs and bring spending growth under control. Our fiscal house today can be put in order again if we make the right choices.
It's not surprising that the budget deficit hit an all-time high in 2004 when it is measured in dollars unadjusted for inflation and unrelated to the size of the economy. The economy, measured in those same dollars, also hit an all-time high of $11.7 trillion last month. When the federal budget deficit is measured properly as a share of the economy - 3.5 percent - at this stage of the business cycle it is absolutely nothing to worry about.
Consider the following quote, which frames the issue of deficits perfectly: "It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits."