As a presidential candidate, George W. Bush vowed he'd cut taxes and also eliminate the national debt. Well, we've had one whopping tax cut already, and the President is seeking another big one. But the national debt shows no sign of decreasing. To the contrary, the President's new and projected budgets promise hundreds of billions of dollars of red ink.
Should we be concerned? In the short term, the answer is no. Federal deficits are not a problem in an economy like ours that's practically comatose. We have a glut of capacity right now. Only three-quarters of our factories are being used. More than 7 million people are unemployed, another million working part-time who'd rather be working full time, another million too discouraged even tolook for work.
In a nutshell, there's not nearly enough demand to soak up all the goods and services we can produce. Businesses won't spend enough on new capital equipmentbecause the customers aren't there to justify the investments. Consumers won't spend enough on new products because they're deep in debt, worried about keeping their jobs, and also concerned about a pending war.
So that leaves -- what? Who? Government! When all else fails, government must be the spender and tax-cutter of last resort. The president's new budget -- with a $304 billion deficit -- is in reality a $304 billion stimulus package, and it's exactly what the doctor ordered. And another $307 billion deficit nextyear won't hurt either because in all likelihood the economy will still have a lot of underutilized capacity and still be struggling to come out of recession.
The problem comes after that -- 2 or 3 years from now, once the economy is backon track, once consumers and businesses are spending again. Over the next five years, Bush's total projected deficit is more than $1 trillion. That's not counting the cost of war in Iraq or anywhere else. These deficits could bring on inflation -- too much demand relative to our capacity to fulfill it. And unless we get these long-term deficits under control, 8 or 9 years from now we won't have enough money for the boomers who reach retirement and expect Social Security and Medicare and who knows what else.
The so-called "supply-siders" in the administration say "don'tworry about long-term deficits" because cutting taxes on the wealthy will cause them to saveand invest more, which in turn will grow the economy over the long term. Butsupply-side economics is based more on religious zeal than on careful economic analysis. Remember, we tried it in the 1980s and ended up with a recession and deficits as far as the eye could see in the early 1990s.
So that's the reality, folks. Don't worry about large federal deficits this year or next. In fact, we need them. But do worry about permanent deficits built into the very structure of the President's new budget -- deficits based on permanent tax cuts mostly for the wealthy coupled with large increases in military spending that are likely to go on indefinitely. We need a stimulus now, but we don't need supply-side economics -- ever.
