Lawrence J.
Haas
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June 9, 2009
Needed: A New Imperative to Cut the Deficit
The recent rise in
interest rates may mark the first sign that the chickens of Washington’s
fiscal recklessness are coming home to roost, as investors worry that
huge budget deficits in the coming years will threaten not just recovery
from today’s recession but longer-term economic growth as well.
Top federal
policymakers are responding. Federal Reserve Chairman Ben Bernanke
recently urged the White House and Congress to get serious about
deficit-cutting, and President Obama’s senior economic advisors signaled
a renewed commitment to the goal.
White House Budget
Director Peter Orszag said that, despite the private hopes of many
lawmakers, President Obama will insist that Congress fully offset the
up-front costs of reforming the health care system. In addition, he
said, the administration will soon recommend further steps to begin
reducing soaring deficits, such as by strengthening the long-term
finances of Social Security.
That’s a good start. If
policymakers do not act, current deficits will send interest rates even
higher (and, thus, threaten economic growth), increase our dependence on
China to buy our debt and reduce government’s ability to meet basic
needs.
But, for Congress,
deficit-cutting is about taking political risks. Lawmakers must raise
taxes, cut spending or both, which will anger powerful constituencies.
On Capitol Hill, Obama’s key proposals to finance health reform and
begin to reduce the deficit are all in trouble, suggesting the tolerance
for risk is quite low.
So, here’s the
question: What will motivate today’s lawmakers to reduce deficits to
economically manageable levels?
Over the years,
presidents and Congresses have addressed budget deficits for one of
three reasons: 1) they were morally opposed to red ink; 2) they worried
that the economy would suffer if they did not act; or 3) the public
demanded that they do so. None of those factors is present at the
moment.
Moral aversion:
For most of U.S. history, Americans and their leaders looked askance at
public debt.
Until Roosevelt’s New
Deal, Washington ran annual surpluses far more often than deficits. And
when it did run deficits, it was usually for one of only two reasons – a
slow economy drained revenues, or the government needed to spend more to
fight a war. Once the economy recovered or the war ended, the government
would generate a surplus and pay off the debt of the previous period.
Since the 1930s, when
Keynesianism provided the intellectual fodder for more routine deficits,
Washington has run deficits far more often than surpluses (although
usually at economically manageable levels).
Economic panic:
After President Reagan pushed tax cuts and a big defense build-up
through Congress in the early 1980s, the deficit exploded – rising from
$79 billion in 1981 to $208 billion just two years later.
Lawmakers of both
parties panicked, fearing such deficits could generate soaring interest
rates, skyrocketing inflation, even economic collapse. Because both
parties had much to lose – Republicans ran the Senate, Democrats ran the
House – they spent much of the ensuing years taking steps to chip away
at deficits or, at the very least, ensure that they didn’t get much
worse.
In virtually every
year, policymakers raised some taxes and cut some spending. The elder
George Bush, who won the presidency in 1988, even broke his “no new
taxes” pledge to secure a big deficit-cutting agreement with Congress
two years later.
Then, with the job of
deficit-cutting not yet finished by 1993, economic panic morphed into
political necessity under President Clinton.
Political necessity: Clinton assumed office after a campaign in which a third-party
candidate, Ross Perot, garnered 19 percent of the vote by speaking
forcefully about just one issue – the budget deficit.
Clinton, who had
promised to cut the deficit in half during that same campaign, felt
compelled to act quickly. By mid-1993, he had pushed his own package of
tax hikes and spending cuts through Congress.
Now, Washington again
faces the prospect of exploding deficits. But, when it comes to fiscal
policy, policymakers have little in common with their predecessors. They
have no moral aversion to deficits, no sense of economic panic over them
and no political imperative to force action.
So they need a reason
to act. Well, here’s one:
Treasury Secretary
Timothy Geithner recently had to beg China’s rulers to continuing buying
our debt. That leaves us beholden to a rising power that wants to
challenge our pre-eminence on the world stage.
Does anyone think
that’s good for the United States of America?
© 2009
North Star Writers Group. May not be republished without permission.
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