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Irresponsible Tax Cuts Sold as Fiscal Responsibility

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Don’t look too close now, but the administration is trying to sell you the London Bridge of economic policy. In an article published in the Wall Street Journal this week, Joshua Bolten, director of the White House’s Office of Management and Budget, essentially claimed that there won’t be any long-term deficits as a result of the two whopping tax cuts enacted by the Bush administration.

The issue is not that the tax cuts increased the deficits in the short-term. Almost everybody agreed that the economy needed a boost from the government. Growth was too slow after the recession ended in November 2001 to generate sufficient jobs to lower the unemployment rate. This goal of the economic stimulus could have been reached more efficiently. That is, the same economic effect could have been reached with a lot less money, or the same amount of government money could have created substantially faster growth. In essence, the large tax cuts were inefficient because they were ill designed and because they contributed to long-term structural deficits.

Rather than address the problem of long-term structural deficits, Mr. Bolten simply wants to make them disappear. Mr. Bolten asserts that budget deficits over the coming 10 years will decline and remain manageable.

This may sound good, if you are willing to ignore economic evidence and political realities. Because there is little we can do about past budget deficits, the biggest concern are future deficits. According to the Congressional Budget Office, the federal government will run a deficit in its on-budget operations of close to $4 trillion over the next 10 years. Including Social Security’s surplus lowers the total deficit to $1.4 trillion. If unrealistic assumptions are eliminated, Bill Gale and Peter Orszag from Brookings estimate that the unified budget deficit increases to $4.6 trillion and even to $7.7 trillion if Social Security’s surpluses are excluded. These unrealistic assumptions include the assertion that the tax cuts won’t be permanent or that the federal government will do nothing to change the alternative minimum tax that will affect a growing number of tax payers. Even without these changes, most observers familiar with the budget outlook, including the White House’s Office of Management and Budget, agree that deficits will become even larger after 2013.

These long-term budget deficits, though, have real economic consequences. Economic evidence shows that they reduce national savings. However, if savings decline, there is either less investment or more borrowing from abroad. Either way, domestic income will decline and with it, living standards. They also have the undesirable effect of restricting the government’s ability to expand spending for necessary programs and for an economic stimulus if another recession occurs in the coming decades.

Deficits have already constrained the government’s ability to increase spending on desirable programs, such as Head Start. As Mr. Bolten points out himself, spending increases are really only occurring for defense and national security. While national security is certainly an important goal for the federal government, there are other important functions to be filled. The administration’s irresponsible tax cuts have effectively restricted the government’s ability to raise spending for other important functions, which may in fact be the tax cuts’ desired side effect.

As for future recessions, the recent experience also holds important lessons. The government’s willingness to incur deficits kept the economy from sliding deeper into the recession. However, similar effects could have been accomplished with lower deficits in recent years and without building up large deficits in the future. Much of the tax cut benefits accumulated to high income earners, who tend to be more inclined to save money than to spend it, exactly the opposite of what the economy needs in a recession. A temporary spending increase, e.g. for higher unemployment benefits, would have been more effective. It would have disproportionately gone to low income earners who are more likely to spend than to save the money, and it would have been limited to the period of high unemployment, the recession.

Thus, reducing long-term structural deficits will give the government the ability to do what it needs to do: run a variety of programs to ensure everybody will have a fair chance and to step in to stabilize the economy when the going gets tough.

Policymakers can walk and chew gum at the same time. The trick, though, is not to bite your tongue. You can have deficits, especially in a recession, and still be fiscally responsible. The challenge is to not mortgage future economic growth to do this. Long-term structural deficits, as opposed to short-term cyclical ones, are harmful since they can reduce long-term growth in living standards. They also restrict the ability of future governments to spend money on socially necessary programs or to stabilize the economy with fiscal stimuli if another recession occurs. That is exactly what this administration has done. And now, it is trying to tell you that biting your tongue, while walking and chewing gum, doesn’t hurt.

Dr. Christian Weller is a senior economist at the Center for American Progress.

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