Reason #4 to Vote for Kerry: Budget Deficits

The largest economic change that Bush has wrought on the US is also one of the most harmful legacies that Bush will leave this country: his creation of large budget deficits that extend into the indefinite future. And he created this fiscal disaster this through specific tax and spending decisions, not because of historical accident or bad luck.

Let us assume that the budgetary effects of the fall of the stock market, recession and the expenses related to 9/11 (including the military action in Afghanistan) were unavoidable. If Bush had forgone his tax cuts and non-9/11 spending increases, then the budget would have moved slightly into deficit for a few years due to the recession, but then recovered. In fact, even if Bush had opted to run large budget deficits for a few years with a plan for restoring fiscal discipline after that, I wouldn’t complain about it. But instead of the budget moving back into balance after the recession ended, thanks to Bush’s policies the budget outlook is for large and worsening deficits, as the following chart illustrates.

Note that Bush’s tax cuts are the overwhelming reason for this massive gap between what the budget would have been without Bush (i.e. under the “Clinton budget”) and what the “Bush budget” will actually cause. The chart below decomposes the changes Bush has caused on the budget picture into the portion due to the tax cuts and the portion due to faster than usual spending increases.

In total, by the year 2014 Bush’s policy decisions will have added a total of at least $5 trillion dollars to the US government’s debt. This means that by the middle of the next decade, an additional $200 billion dollars of tax revenue will need to be raised each and every year simply to make the interest payments on Bush’s debt. To actually repay the debt (rather than just make interest payments on it), the generation of Americans that are today’s children will have the choice of either cutting the provision of discretionary federal services (other than defense) by about 50%, or else raising payroll taxes by over 30%. (Source: Gale and Orzag, “Bush Administration Tax Policy”.) This seems a pretty poor legacy to leave to today’s children.

But isn’t it possible that some of these policy changes will have some positive effects on the economy, thus leaving the future generation better off, not worse off? Unfortunately, the answer is almost certainly no.

Tax cuts may indeed increase the incentives for individuals to work and businesses to invest, and this is the way in which proponents of tax cuts to encourage growth argue that it would happen. But tax cuts have other effects as well which discourage growth, and these negative effects are probably at least as large as the positive effects.

First, while lower taxes increase the incentive to work because the hourly return to working goes up, they also decrease the incentive to work because they enable households to reach a desired level of income by working less. This income effect is probably not as great as the positive incentive effect, but it certainly does mitigate it.

Secondly and more importantly, if tax cuts are not offset by spending cuts then they reduce national savings. This in turn means that there must either be a reduction in domestic investment or in net foreign investment. Either way, tax cuts unmatched by spending cuts reduce the capital stock of the US, and thus reduce future income and living standards.

Laurence Kotlikoff and William Gale provide a thorough survey of the evidence on this issue, and conclude that this is not just a theoretical possibility. The preponderance of empirical evidence indicates that tax cuts that are paid for by government borrowing (rather than by reduced government spending) actually reduce, not increase, future national income. So the legacy Bush is leaving to our children looks even worse.

Bush’s responsibility for this theft of resources and opportunities from today’s children is reason enough to vote for Kerry. It would be hard for Kerry to do worse. But actually, there is good reason to believe that Kerry will do considerably better.

Kerry’s economic team is composed of veterans from the Clinton administration: Gene Sperling, Laura D’Andrea Tyson, and Robert Rubin to name a few. They are people who believe firmly in the importance of fiscal discipline, and indicate that he will be receiving his economic advice from deficit hawks.

Kerry himself seems to have embraced the logic that balanced budgets help the economy grow. He has a reasonable record of fiscal discipline in the Senate; according to the non-partisan Concord Coalition, Kerry’s voting record over the past several years has been stronger on fiscal discipline than the those of most Republican Senators, such as Frist, Hatch, or even Grassley.

During the campaign, Kerry has proposed numerous tax and spending changes: tax increases on income over $200,000; modest middle-class tax decreases; a modest reduction in corporate tax rates; implementation of the McCain-Kerry Worporate Welfare Commission to reduce some corporate tax loopholes; an increase in national spending on health care and education; and a few other small proposed spending increases. Together, these proposals roughly balance out, perhaps leaving a little room for deficit reduction but not a lot.

But the most important policy change that Kerry has promised to implement is to restore the importance of addressing the budget deficit. The Kerry campaign has repeatedly promised to scale back their spending increases if necessary to acheive what has clearly been stated as their primary goal, which is fiscal responsibility. In other words, as president, Kerry would make his tax and spending policy subject to budgetary constraints. This is exactly the opposite of the Bush administration’s approach to budgetary policy. And this is therefore one of the most important reasons that I can think of to vote for Kerry.