WSJ: Why Today's Soaring Deficits Don't Inspire Fears

[question everything]

July 12, 2004

Though New Threats Loom, Complacency Has Reigned Since '80s Concerns Faded

By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
July 12, 2004; Page A1

(snip)

The main threat of deficits is that they consume scarce savings, money that could be more productively invested in factories, research and development, and must eventually be repaid -- with interest -- by future taxpayers. Today there is also a smaller, but more hair-raising, deficit threat that is receiving increased attention from some economists: that the investors who finance our deficits by buying Treasury bonds and bills, especially the foreigners who buy a larger share of them than ever, will question our ability to repay them, and balk at lending more -- triggering a big drop in the dollar and much higher interest rates.

(snip)

Given that outcome, many of today's conservatives seem to have concluded that President Reagan's example shows that tax-cutting brings enormous political benefits while deficits come with few costs. Earlier this year, in his book "The Price of Loyalty," author Ron Suskind, a former Wall Street Journal reporter, wrote of then-Treasury Secretary Paul O'Neill being told by Vice President Cheney in 2002: "Reagan proved deficits don't matter." Asked for comment this year, Mr. Cheney said he believes deficits do matter, but the budget shouldn't be balanced at the expense of "adequately funding our military operations," or of "pro growth" tax cuts.

(snip)

Yet amid debates about terrorism, war and jobs, the deficit has barely registered as an issue in this year's presidential election. President Bush rarely mentions it. At a recent forum organized by the antideficit Concord Coalition, Rep. Michael Castle, a Delaware Republican, wistfully recalled that Republicans used to run on balanced budgets. "Now, it's all tax cuts," he said. For his part, presumed Democratic nominee John Kerry says he would restore deficit-control laws, but like Mr. Bush, has no specific plan to balance the budget.

(snip)

In a 1982 memo prepared for a retreat of Reagan officials, future Fed Chairman Alan Greenspan wrote, "The markets believe that the federal deficit will continue to hemorrhage, inducing the Federal Reserve to create excessive money supply growth and hence inflation." Later that year, newly-installed Council of Economic Advisers chairman Martin Feldstein advised that deficit cuts would help lower interest rates "and accelerate the recovery." At the time, politicians coalesced around deficit-fighting measures in part because concern was shared by both Republicans in Congress such as Sen. Warren Rudman and conservative Democrats. "Ronald Reagan signed 18 tax bills, 14 raising taxes and four cutting them," recalls Rep. Charles Stenholm, a Texas Democrat who has served in Congress since 1979. "He was willing and able to get compromises with his own party."

(snip)

But, he (Harvards' Benjamin Friedman) asserted, the idea that Mr. Reagan proved deficits didn't matter economically "is just wrong on the facts." Deficits crowded out private investment, reduced economic growth and, he estimated, left annual GDP $500 billion a year smaller today than it otherwise would be, an amount equal to about 5% of today's GDP. Nor, he noted, did the U.S. simply grow its way out of deficits: It took painful tax increases and spending cuts by the first President Bush in 1990 and President Clinton in 1993 to eventually balance the budget.

(snip)

Experience suggests that markets have to move violently before they galvanize politicians into action. The Sarbanes-Oxley Act intended to crack down on corporate accounting and governance abuses might not have happened if the stock market hadn't tanked in 2002. This is why some pessimistic deficit hawks conclude the budget will continue to deteriorate until a crisis occurs.

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Write to Greg Ip at [e-mail]

URL for this article:
http://online.wsj.com/article/0,,SB108958360900760766,00.html

[unblock]

1. deficits don't matter today because republicans are in power

the media look the other way when republicans loot the treasury.
it's only when democrats spend money that deficits matter.

that's why they call it the 'liberal media', silly!

[fearnobush]

2. I think the Kerry is holding off on this issue until it resurfaces

a week or two before the Repuke convention. my guess

[KoKo]

3. Kerry's going to have his hands full because this proped up economy is

probably going to implode shortly after January next year when all the distortion of figures from government agencies and by the Corporations to prop these crooks up for four years comes to light.

Repugs only hope is to make it look like it was Kerry's fault this happened and blame it on him through our Corporate controlled media to convince America that the Bush years were just great but the Dems destroyed the economy.

I don't think it will work this time, but never has an administration come in and worked so hard to destroy our economy for the future. There won't be anything left but debt when they pack their bags. And, they will probably take the White House silverware and china with them when they leave office. :nuke: