If you are worried about the federal deficit (and you should be), ask yourself which would do more to improve the country's finances—President Bush's latest budget or a pastrami sandwich. The administration made much of the fact that the budget Bush proposed in February was his tightest yet and was projected to reduce the deficit by half, to $207 billion, in 2010. What the administration did not make much of—you had to look deep in the fine print—is that the deficit would actually decline a bit more between now and 2010 if the Bush plan were not enacted and existing laws were just left alone.
In other words, go with the pastrami. It is fiscally sounder, plus it's good with mustard and a dill pickle.
Bush is a risk taker, and nowhere is his audacity more pronounced than in his willingness to tolerate large deficits in order to achieve other aims. He came to office looking at a budget surplus of $5.6 trillion over ten years, and converted it into deficits that will amount to something like $2.6 trillion over those ten years. However one feels about this, it was one of the largest fiscal dislocations in modern American history.
How should one feel about it? Not happy, of course. Enormous deficits pose significant risks. As many economists see it, the economy's main long-term vulnerability is the combination of negative government saving—that is, deficits—and low private saving, which together make the United States dependent on foreign capital. Eventually the imbalance will have to be corrected, and as James Fallows shows elsewhere in this issue, an abrupt correction could be depressing in both the economic and emotional senses of the word.
Yet some risks are worth taking. There are worse things in life than deficits. One way to evaluate Bush's policies is by asking which president he will end up most closely resembling—Ronald Reagan or Richard Nixon.
In the half century before Bush, the United States had already experienced two great fiscal dislocations. The second and better known occurred during the early 1980s, when Reagan raised defense spending and cut taxes. The deficit soon reached six percent of GDP, a level since unmatched. Good-government types—I confess I was one of them—decried Reagan's deficits as the height of recklessness. Then the Soviet Union collapsed. Many people, and not just Reaganites, have plausibly argued that Reagan's defense buildup played a leading role in pushing the Soviet regime over the edge. If that's true, then in hindsight the Reagan deficits look like money well spent.
Where deficit spending is concerned, Bush outdoes Reagan. He nearly doubled the Department of Education's budget, approved an expansion of Medicare that added $17 trillion to the program's already staggering ($45 trillion) unfunded liability, and has spent more than $200 billion on Iraq and Afghanistan and other elements of the war on terror.
Of course, Bush and other Republicans argue that they are investing, not just spending. They will tell you the education money bought a national regime of testing and standards that will improve American schools. They say the Medicare spending bought some structural innovations—notably personal health savings accounts—that could lay the groundwork for a more rational, market-oriented health-care system. Yes, the Iraq War and its aftermath are expensive (and money is the least of it); but the administration hopes to buy a new, more democratic social order in the Arab world.
Critics of Bush's aggressive first-term tax cutting may be forgetting how perilous the economic situation was during his first couple of years in office. The U.S. economy might have contracted severely in the wake of the dot-com bust and 9/11, and could have dragged much of the world down with it. Instead it slowed but, remarkably, never stopped growing—partly because aggressive tax cutting helped sustain consumption. It may be true, as some have complained, that smaller or temporary tax cuts would have sufficed, but that sort of second-guessing is a luxury possible only after a potential crisis has passed. "One way you can characterize the decision-making was, Avoid the extreme downside at all costs, and you can go back later and pick up the pieces," Douglas Holtz-Eakin, the director of the Congressional Budget Office, told me.
In sum, Bush and his advisers believe they have used deficits to solve bigger problems. They expect that Bush will look like Reagan. They may be right. Then again, he may end up looking like Nixon.
Nixon was responsible for the other great fiscal dislocation. Intent on buying popularity, he watered and grew the Great Society programs that Lyndon Johnson had seeded, and he increased entitlement spending by a startling four percent of GDP. Nixon left behind a chronic deficit in the range of two to four percent of GDP—roughly the same as today's. Coping with his fiscal dislocation would be the job of every president from Ford to Clinton.
Nixon's fiscal gambles differ from Reagan's in two important respects. First, Reagan changed course. When the deficit became alarming, he acceded (reluctantly, to be sure) to tax increases and defense cuts. He stopped making a bad situation worse, and he left the deficit, as a share of GDP, only slightly higher than he found it. Second, Reagan arguably got a geopolitical transformation in exchange for his fiscal rupture. Nixon got a permanent entitlement crisis, a twenty-year budget crisis, high inflation, and a reputation for opportunism.
So how will Bush look? The answer depends less on what happened in his first term than on what happens in his second. Bush's first-term deficits were defensible as responses to emergencies, but the emergencies are over; and the strategy of avoiding the extreme downside and picking up the pieces later works only if you do pick up the pieces later. That would involve cutting spending more deeply than Bush has yet proposed, revoking some of his tax cuts or reforming the tax system in ways that generate new revenues, and, at the very least, paying for his initiatives. So far he has shown little inclination to do any of those things; in fact, he wants to make the tax cuts permanent.
"The lady's not for turning," Margaret Thatcher once famously said. Resolve is a good thing in politics—up to a point. If Bush wants to take the road to Reagan's legacy instead of to Nixon's, the moment to turn is any time now.
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