Bush And The Budget: Don't Make A Bad Mistake Worse

During the 1980s, budget deficits that were small by current standards were blamed on tax cuts. President Reagan's policies were said to have buried the U.S. under a deluge of red ink, sucking in the rest of the world's capital to finance the U.S. national debt.

In this jihad against Reaganomics, facts fell on deaf ears. For instance, when the Federal Reserve Bank of St. Louis announced in October, 1988, that the growth rate of national debt in the U.S. during the 1980s was no greater than the average growth rate of debt of the Group of Seven industrialized countries, the news went unremarked. That's odd, because if the U.S. was using the world's capital to finance its debt, which more than doubled in the 1980s (as it had in the 1970s), then who was financing the growth of debt in Canada, France, Italy, Japan, and Britain, where national debts also more than doubled, and in Germany, where debt almost doubled?

Such interesting questions never found their way into the minds of media pundits or university professors. Instead, hostility toward tax-cutting found its way into the economic policy of the U.S. Since 1982, federal taxes have been raised by an amount greater than the size of the 1981 tax cut.

This tax-hike policy culminated in the autumn, 1990, budget agreement. As reflected in The Budget of the U.S. Government, Fiscal Year 1992 (issued in January, 1991), this agreement projected the swift demise of the federal deficit. At last, declared its admirers, supply-side economics had been benched, and lower interest rates from deficit reduction would reinvigorate the economy.

ENDLESS BURDEN. Now, the facts are in, and the promises of the budget agreement have proven to be hollow. The budget for fiscal year 1993 (issued in January, 1992) shows an unprecedented deterioration in the economic and budgetary outlook. Compared with the five-year forecast in last year's budget, the 1992-1996 structural budget deficit (the red ink that remains after deleting the effects on the budget of the recession and deposit-insurance bailout) has increased $900 billion--a sum substantially larger than the five-year cost of the 1981 tax cut. Moreover, the new budget shows the annual structural deficit--which had all but disappeared in last year's budget--persisting around the $200-billion level for as far as the eye can see.

The promised vigor from lower interest rates has disappeared, too. Compared with a year ago, the outlook for the economy has deteriorated so badly that the government now expects $1.26 trillion less growth in our gross national product over the 1992-1996 period.

Most astonishing of all, the structural budget deficit for fiscal year 1992 is now projected to be $120 billion larger than that of a year ago. Despite--or because of--the tax increase, the latest budget estimates $89 billion less in tax revenues in 1992 and $536 billion less over the 1992-1996 period. Meanwhile, spending is up $273 billion despite the new cutbacks in defense outlays.

When President Reagan left office, the economy was growing and the deficit was not. Compared with today's $401 billion deficit, Reagan's was a mere $150 billion. Under President Bush, the opposite has occurred: The deficit has grown and the economy has not.

In the face of this experience, there is no basis for the belief that tax increases help the economy by reducing deficits and interest rates. If lower interest rates offset the harmful effects of tax increases, the economic outlook would be better, not worse.

PIE IN THE SKY? This terrible budgetary outlook is based on such favorable economic assumptions that they make the "rosy scenario" of the Reagan Administration seem pessimistic. If Congress doesn't pass the paltry revenue-neutral tax package that President Bush outlined in his State of the Union address, the Office of Management & Budget calculates that a minimum of $201 billion has to be added to the cumulative deficit, and an additional $585 billion (in 1987 dollars) has to be subtracted from the U.S.'s already-diminished economic-growth path.

So much for the vaunted budget agreement that was going to save the economy from deficits. President Bush should have known that any agreement supported by the editorial pages of The New York Times and The Washington Post could not possibly be in his interest. Now, with his Presidency imperiled, Bush has fallen back on tax cuts--though revenue-neutral ones, of course--in order to save the worthless budget agreement.

Bush has the power within his grasp to save the economy and his Presidency. The Treasury can index capital gains and depreciation for inflation simply by issuing new regulations. The cost basis of capital gains and business depreciation are defined by regulation and not by statute. It is ridiculous for President Bush to put the economy and his reelection prospects in the hands of his opponents in Congress when he can cut taxes through regulatory action. Indexing the capital-gains tax would lower the rate, and adjusting depreciation for inflation would increase business cash flow. By not using his powers, Bush has chosen slogans over action.