by Dean Baker
September 3, 2003
Most economists would agree that there is nothing wrong with running a deficit -- even a large deficit -- when the economy is in a slump. But the new budget projections from the Congressional Budget Office show large deficits for the indefinite future. Is President Bush expecting a very long slump?
To say the president does not espouse a clear economic agenda is a massive understatement. For example, at a news conference last month Bush responded to a question about rising unemployment and his economic policies by saying:
“The '01 tax cuts affected the recession this way: It was a shallow recession. That's positive, because I care about people being able to find a job. You know, some have said, ‘Well, maybe the recession should have been deeper in order for the rebound to be quicker.’ My attitude is: A deeper recession means more people would have been hurt. And I view the actions we've taken as a jobs program -- job-creation program.”
Presumably, President Bush did not really mean to imply that the economy would be in better shape, and the unemployment rate lower, if the recession had been deeper. He might have meant that the economy would have grown faster if the downturn had been sharper, but not that -- if the downturn in 2001 had been worse -- the net effect on the economy would have been better.
In fact, the period of slow growth since President Bush took office has led to the largest prolonged period of job loss since the Great Depression. Since February 2001, the private sector has lost more than 3 million jobs. While previous recessions recorded steeper job losses, the rebounds also happened more quickly. Only in this recession has the economy continued to shed jobs for such a long period, with no obvious turnaround in sight.
Bush is correct to claim that tax cuts have helped to boost the economy and create jobs, but only because Democrats in Congress intervened to obtain a more progressive tax cut. In 2001, tax rebate checks of $300 were sent to most middle and upper income taxpayers. Coming in the middle of the recession, this tax cut was almost perfectly timed to boost the economy. However, Republican congressional leadership opposed this $300 tax rebate, which Democrats initiated. In order to overcome opposition to the larger tax bill, the Republican leadership eventually accepted the rebate as a watered-down version of the Democrat’s more progressive tax cut.
The rest of the tax cut -- most of which went to the wealthiest families -- did provide some boost to the economy, but we got very little bang for the buck. When we give $100 billion a year to the nation’s millionaires (approximately the impact of the Bush tax cuts), they will spend some of this money and thereby help to stimulate the economy. But, if we gave the same $100 billion to low and moderate income families, they would spend a much larger share of this money, giving the economy a far bigger boost. Even better, if we gave this money to state and local governments to cover their deficits, they wouldn’t have to lay off teachers and firefighters and/or raise taxes themselves, and the economy would get an even bigger boost. So, President Bush’s tax cut may prove better than nothing in the short-run, but almost any other tax cut or spending would have provided more stimulus.
Over the longer term, Bush’s tax cuts will create serious deficit problems. In his press conference, he downplayed the impact of his tax cut by saying that it only accounts for a fourth of the shift from surplus to deficit. While this math is close to accurate, it still means that his tax cuts are adding $200 billion a year to the budget deficit. This is a big addition to deficits that would have already far exceeded $200 billion a year even without the tax cuts. While it's good policy to run large deficits during a slump, it will not be possible to sustain these deficits long into the future -- large tax increases and/or spending cuts are inevitable.
Does the Bush administration have an economic plan for the long-term? This isn't at all clear. While his advisors insist that the economy will grow its way out of the deficit, the growth rate needed to reduce the deficit to a manageable size is far faster than anyone, including Bush administration economists, is predicting. The only question is whether President Bush will be forced to acknowledge this prior to the next election.
Dean Baker is co-Director of the Center for Economic and Policy Research, a nonpartisan think-tank in the nation's capital. Readers may write him at CEPR, 1621 Connecticut Ave NW, Suite 500, Washington, DC 20009-1052. This article first appeared in Tom Paine.com (www.tompaine.com)