Commentary: Can the Democrats Profit from the Return of Deficits?

When Bush unveils a 2003 budget with a $100 billion dollar shortfall, the Dems will come out swinging

Once upon a time, Republicans were the dour guardians of budget discipline. Democrats rooted blissfully at the federal trough while they hummed Happy Days Are Here Again. But where are those happy profligates of yesteryear? Intent on indicting Bushonomics for the return of budget deficits, they're marching toward Election '02 as staid and sober as a pack of actuaries. The party's new theme: Stormy Weather.

That will be a tough stance to maintain in light of the latest gross domestic product report, which shows that the economy has shaken off the slump. Indeed, in his Jan. 29 State of the Union address, President Bush described the return of the red ink as a "small and short-term" problem. Democrats gave him a respectful hearing, as befits a leader boasting an 84% approval rating. But the gloves will come off on Feb. 4 when the White House unveils a 2003 budget with a $100 billion shortfall.

To Democrats, the return of deficits a year after the Congressional Budget Office forecast a $5.6 trillion surplus over the decade serves as proof of Bush's fiscal failure--and recovery or not, it will frame the party's assault in November. "Republicans created a fiscal mess and are endangering long-term growth," says Democratic pollster Stanley B. Greenberg.

The Dems' complex argument goes something like this: While the GOP claims the deficit is cyclical and will vanish when strong growth resumes, Democrats hint that the U.S. may be facing structural deficits. The cause? Bush's big tax cut, which could end up costing $2 trillion if it becomes permanent and interest costs are added in. The current CBO surplus projection for the period: $1.6 trillion.

The President believes that trims in marginal tax rates are growth enhancers, and with unemployment likely to rise for many months, he still thinks stimulus is needed. So he continues to back plans for a $100 billion jolt. But as pols sense the slowdown may be over, odds for a big package fade.

Even if tax revenues rebound next year, Dems fear that Bush's tax-rate cuts will not be a supply-side growth elixir. Instead, the specter of shrinking surpluses could push up interest rates and crimp economic growth. And in an ensuing crunch, they fret, tax cuts could crowd out spending on schools, health care and the like. "Market rates didn't come down at all last year despite 11 Federal Reserve rate cuts," says former Clinton Treasury Secretary Robert E. Rubin, now chairman of the executive committee at Citigroup (C ). One reason: "The deterioration in our [long-term] fiscal situation." But Rubin concedes Democrats are having trouble making this argument. "It is very, very hard" to explain, he laments.

While Democrats radiate Mondale-style pessimism, Republicans are models of Reaganesque optimism. "In past recessions, deficits ranged from 2% to 4% of gross domestic product," chirps Budget Director Mitch Daniels. "This time, it's well under 1%. The ink is red, but just barely." Besides, add conservative economists, small deficits are meaningless. Says Dan Mitchell, an analyst at the Heritage Foundation: "In a $10 trillion economy, blips in deficits or government spending are insignificant."

According to American Enterprise Institute economist John H. Makin, Republicans now see deficits as a by-product of the need to run a more stimulative policy during a slump. "In the '90s, there was this notion that low deficits equal high growth," he says. "Now we see that government needs to run more like a corporation, issuing debt during a downturn." To Makin, the turnabout is stark: "Democrats are turning into old-fogie Republicans, warning about deficits and anemic growth."

Fogies or not, the Dems still hope to make deficits scary. A Jan. 17-20 ABC poll found that by 52% to 32%, Americans would defer tax cuts to keep the budget in balance. But overall, Bush, with his bigger megaphone and some economic stats going his way, seems to be winning this debate. In a Jan. 24-27 Gallup Poll, voters favored his economic stewardship over the Democrats' by 55% to 36%.

The bottom line for Democrats is that they may need a bout of economic malaise to get traction on the fiscal mismanagement issue. But with recovery signs blossoming, the portents for a campaign built around pessimism don't look bright.

By Lee Walczak and Richard S. Dunham

With Rich Miller in Washington

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