By Christopher Farrell
The parking lot was full at my local mall last Thanksgiving weekend. I've noticed that holiday gift lists seem a bit longer this year compared to last. Almost all signs suggest a stronger-than-expected economic rebound. Factories are running at their fastest pace in two decades. Productivity soared at an astounding 9.4% annual rate in the third quarter. Business investment is strong. The labor market is perking up. What's not to like?
The budget deficit, for one. Here is an amazing -- and disturbing -- statistic: The U.S. had a budget surplus in January, 2001, of $269 billion. The current budget deficit is $390 billion, and most economists predict it will swell to at least $500 billion by next year's November election. That's a breathtaking swing of $769 billion, before taking into account the trillions in long-term debt burdens Washington is blithely passing on to future taxpayers.
Sure, a portion of the budget deficit stems from waging war in Afghanistan and Iraq, as well as countering the damaging effect of an economic downturn with fiscal stimulus. Nevertheless, even vigorous growth won't bring the budget under control.
"Any relief is fated to be temporary, as the massive obligations of Medicare, prescription benefits, and Social Security loom just over the horizon," says Peter Bernstein, the dean of finance economists. "Who can be complacent when we are heading into that firestorm?"
Unfortunately, the Bush Administration seems all too complacent about budget deficit's long-term impact. The reason is partly that the Administration doesn't have any economic vision beyond tax cuts. The President is already lobbying for making a number of existing, temporary, breaks permanent, which would worsen the deficit. More frightening is that it seems the President has no deeper policy strategy beyond getting reelected.
David Warsh, an astute economic commentator, has noted that the dominating figures of the Bush Administration, like Donald Rumsfeld and Dick Cheney, have been around for more than 30 years, first coming together in the Nixon Administration. "Their nightmare is a one-term Presidency," says Warsh. "It happened to them in 1976. It happened again in 1992. In 2004, they're determined to prevent it happening again."
Adds Edward Yardeni, chief investment strategist at Prudential Equity Group: "The Bush Administration is doing everything that's legally possible to win a second term for the President. They've cut taxes for just about everyone. The President hasn't vetoed a single spending program passed by Congress."
To be fair, all incumbent Presidents cull favors and lobby for unappetizing legislative initiatives during election years -- it's in the nature of the beast. Depending on your party politics, you may get upset or simply shrug your shoulders at politics as usual. But Washington hasn't handed out goodies like this since Richard Nixon's all-out campaign to get reelected in 1972. And the comparison is worrisome. The Nixon years set the nation on a course that culminated in the devastating 1970s inflationary spiral.
In Nixon's first term, the Vietnam War was unpopular, the economy was weak, and inflation stirring. According to historian Allen Matusow, Nixon turned to Treasury Secretary John Connolly to do whatever it took to get the economy rolling enough to satisfy voters. Connolly, a blunt-talking Texan well schooled in hardball politics, quipped to Nixon "I can play it round, I can play it flat, just tell me how to play it."
Here's how it played out: America got wage and price controls. It severed the link between the dollar and gold. The dollar depreciated. The federal budget deficit soared. Nixon also cut a deal with Wilbur Mills, the powerful head of the House Ways & Means Committee, for a huge 20% increase in Social Security benefits that year, an agreement that vastly contributed to the pension system's funding difficulties in later years. Shades of the 2003 Medicare drug bill?
Nixon won in a landslide. But the legacy of his economic policies was disastrous for business and workers over the next 20 years or so. And while I don't think inflation is in the cards, the danger is that the Bush Administration may saddle future taxpayers with an enormous bill that could alarm financial markets, dramatically slow the economy's underlying growth rate, lower living standards, and poison politics even more than it is today.
Here's a line I never thought I would write: Ross Perot, where are you? The quirky Texas businessman and political gadfly tapped into a popular wellspring of worry during the 1992 Presidential campaign. He forced both President George H.W. Bush and his rival Bill Clinton to embrace deficit reduction. Clinton won, and the rest, as they say, is history.
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online
Edited by Beth Belton