Bush Talks Deficit Nonsense

President Bush will tomorrow make a speech hailing his achievement in cutting the budget deficit in half. It will be a stunning act of economic hubris. Here is why. First, you introduce policies which vastly increase the deficit through unfunded tax cuts and large spending increases. Second, you predict a dubiously high budget deficit figure a few years out, just at the point in the cycle where you'd expect the deficit to decline naturally. (Tax recipts increase relative to fixed outgoings, all things being equal, the longer into an economic cycle you are. Hence most economists like the to budget balance on average over the course of an expansion, but think its ok to run deficits at certain points.) Then, from this artificially high base you claim success by having halved an imaginery figure - reaching a level that is still billions below where it ought to be for this point in the economic cycle. And Voila, as the Republicans probably would not say.

President Bush's policy has created a structural deficit of hundreds of billions of dollar. This will lower savings and investment, contribute to the trade deficit, and lower long term growth. And, as Brad DeLong points out in this post i've linked to before, the tax cuts - by virtue of being unfunded - aren't really tax cuts at all. They are just tax increases deferred to the future generations who will have to fix the mess.

As Milton Friedman puts it, to spend is to tax. Bush's spending increases--defense, Iraq, the Republican porkfest, the Medicare drug benefit--are still there, just as things you have charged to your VISA don't go away if you make only the minimum monthly payment. What George W. Bush has done has been to shift taxes from the present to the future--and also made future taxes uncertain, random, and thus extra-costly from a standard public finance view.

Remember, at the same point during the Clinton years - after four years of strong economic growth, the budget deficit was just about gone. So, as this graph from Reuters's shows all too obviously, there is a clear $200bn gap between where the public finances are, and where they should be under a responsible government. All the more shameful, then, that Republican candidates accross the country are robotically trotting out tax-and-spend liberal attacks against any opponent who even dares to suggest that, one day, someone is going to have to fix this mess. So tomorrow i think most economist's will be listening to this President's claims, but thinking of words attributed to another: "'Tis better to be silent and be thought a fool, than to speak and remove all doubt."