Clash of visions over deficit

GOP thinks cutting taxes to boost economy is crucial. Critics say a $455 billion budget gap will slow growth.

President Bush's economic team cheered signs of economic recovery at a forum Wednesday - with nary a tear shed for the prospect of rising federal deficits for years to come.

That marks a sharp shift from President Clinton's days, when official Washington was still riveted on curbing deficits as priority for economic growth. Since the early 1980s, budget battles in Congress turned on that goal.

And Clinton Treasury Secretary Robert Rubin codified it in a simple formula: Curb deficits and you lower long-term interest rates; businesses will invest, and the economy grows.

Today, from economic forums in Crawford, Texas, to decisions on Capitol Hill to cut taxes without cutting spending, all signs point to change in the fiscal rules.

The prospect of rising future deficits, some economists warn, is a key factor causing interest rates to edge up in recent weeks - a troubling sign for an economy that has lost 2.7 million jobs since George W. Bush took office in 2001.

So what happened to make official Washington turn its back on the Rubin mantra?

In part, circumstances themselves have changed. The concern of this administration is how to stimulate the economy, with interest rates already at 40-year lows, not how to bring interest rates down. And the 9/11 terrorist attacks created new mandates for national-security spending.

Then there's the sheer force of Mr. Bush's fiscal convictions: He has helped turn his party wholeheartedly back to the supply-side notion of Ronald Reagan: Cut taxes, and economic growth will follow.

"You've heard the president say very clearly and often that the deficit is important ... but the bigger priorities right now are getting people working, fighting the war on terrorism, and winning the war," said presidential spokeswoman Claire Buchan at his Crawford ranch Tuesday.

Reports of prospective budget deficits of $309 billion were enough to force President-elect Clinton to scuttle social spending plans in the early days of his administration. Now, the Bush administration faces even higher deficit projections, but is not backing down This year's deficit will be a record $455 billion, says the White House Office of Management and Budget. The Congressional Budget Office recently set the deficit at $401 billion, also a record.

Critics say that deficits of this magnitude could scuttle the economy's budding recovery and lay unacceptable burdens on the next generation of taxpayers. "The Bush fiscal policy is the worst policy in over 200 years," says George Akerlof, an economist at the University of California at Berkeley and 2001 Nobel laureate. He pegs the deficit over the next 10 years at almost $6 trillion.

"The consequences of these policies will be substantially higher long-term interest rates," adds economist Janet Yellen, a former Clinton adviser.

Still, the fact that holds sway for now is that interest rates are historically low. The Federal Reserve said Tuesday it would keep its interest rate target at a 45-year low of 1 percent, and added - uncharacteristically - that such rates could be expected "for a considerable period."

Changed habits in Congress

In addition, politicians on both sides of the aisle are back into the habit of spending. Two years of budget surpluses undermined the rationale for formal budget disciplines, such as pay-as-you-go requirements to find offsets for new spending, which have been allowed to quietly expire. And the war in Iraq and homeland security also claimed priority over deficit-busting in Congress.

Once broken, the gates were open for spending well beyond those objectives. Pending legislation in Congress includes a $400 billion prescription drug bill and an energy bill that includes more than $30 billion in new tax credits. In addition, House Republicans are proposing at least $82 billion in new tax cuts.

Business: a silent partner?

Another striking shift in the political landscape is that business groups are no longer clamoring for deficit reduction. Once powerful lobbyists for deficit reduction, top business groups want to see corporate tax cuts and subsidies from Congress this session, especially a controversial $100 billion overseas tax credit.

"The business community is happy to have a Republican administration, and doesn't want to rock the boat," says a Robert Bixby, executive director of the Concord Coalition, a public interest group that advocates fiscal discipline. Last month, the coalition dubbed the first six months of the 108th Congress "the most fiscally irresponsible in recent memory."

"Following the lead of the Bush Administration, Congress made no attempt to reconcile the cost of new tax cuts and spending initiatives within the framework of a realistic long-term balanced budget plan. Instead, policymakers took a deteriorating budget outlook and made it worse," the report concluded.

What drew business groups into the deficit battle in the 1990s was a concern that government borrowing was driving up interest rates and squeezing out capital for business, he adds. Recent convulsions in the bond market "might be one of those things that gets the attention of the business community again," he says.

When the battle for fiscal discipline is again engaged, it will be protracted and difficult for both sides of the aisle, experts say.

"We're in a real bind. There will be no way out of this that isn't very painful, and painful fiscal measures usually result in political suicide for those who are making the decisions," says Robert Reischauer, president of the Washington-based Urban Institute and a former director of the Congressional Budget Office.

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