Deficit declines $100 billion

Posted: Oct 18, 2004 12:00 AM

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."

These are not the words of President Bush on the stump, speaking to the faithful; these are the words of John F. Kennedy trying to persuade the skeptical of his day (largely Republicans) that his tax-rate reductions were the proper course of action in 1962 to "get our economy going again."

We heard the same talk of "deficits as far as the eye can see" after President Reagan signed his 25-percent, across-the-board tax-rate reductions into law in 1981. Yet for all of the hysteria, the deficit as a percentage of GDP, which was 2.6 percent during Reagan's first year in office, was 2.8 percent of GDP when he left office in 1988.

The press also often neglects to report that deficits spiked at 4.7 percent of GDP in 1995 due to sluggish growth following the Clinton tax hikes. The economy didn't begin its revival until the Republicans seized control of Congress in 1994, forcing a reluctant president to reduce the capital gains tax rate, create Roth IRAs and get spending growth under control. Then the private economy was free to grow faster than the government and budget deficits were transformed into surpluses.

Since the 2003 tax-rate reductions, our economy has grown at an annualized rate of 5.1 percent. The unemployment rate has come down to 5.4 percent, lower than the average during the 1970s, '80s and '90s. As a result, revenue growth has been steadily rising and the deficits steadily declining. Since January the projected deficit has plummeted by nearly $100 billion from earlier estimates of $500 billion to $413 billion.

Another misleading headline constantly repeated by Sen. John Kerry on his soapbox is that the gap between the richest and poorest Americans continues to widen. I have always maintained that the worker and investor are not two different people. They are the same people but at different stages of their lives. Census data show that in just three years, 1996-1999, 38 percent of those among the lowest quintile of income earners had progressed to a higher bracket. Similarly, with approximately 70 percent of American families owning a home, homeownership is hardly the domain of the "rich." Ditto with stock ownership. Today, more than 50 percent of families directly or indirectly own stock.

It always drives me politically crazy to hear Democrats engage in class warfare. Democrats can complain all they want about tax cuts for the top 2 percent, but the reality is that our tax system is becoming more progressive, not less. By 2002, the top 20 percent of all taxpayers earned 50 percent of all income. And by 2002, that same group paid 82 percent of all taxes. Moreover, according to the nonpartisan Congressional Budget Office, as a result of the Bush tax cuts all taxpayers faced lower effective tax rates, and 7 million of the lowest income workers were removed from the tax rolls altogether.

Looking ahead to the next four years, our goal should be economic growth rather than reducing deficits per se. If growth is the goal, then tax increases, trade restrictions and nationalized health care are the wrong choices. If long-term growth is our goal, then we will reject tax-and-spend redistributionist policies masquerading as fiscal discipline; and, if long-term growth is our goal, we will continue to pursue lower tax rates on all Americans, free trade, less regulation, tort reform and entitlement reform. Those are the right choices.