Yesterday I saw that N. Gregory Mankiw, who earlier this year became chairman of the White House Council of Economic Advisors, has written a spirited defense of the Bush administration’s record-high budget deficits, pegged this week at $455 billion.
Now I’m not going to question Mankiw’s expertise on economics. Unlike too many folks at the White House, Mankiw is a respectedand experienced scholar. He’s probably forgotten more about the “dismal science” than I know.
However, if this op-ed is the best the administration can come up with to defend the biggest deficits in American history, they’re in trouble. Come to think of it, so are the rest of us.
Mankiw urges us to keep “the current deficit…in proper perspective.” Fair enough. He then explains three reasons why half-trillion dollar deficits aren’t so bad. The explanations are hardly persuasive.
“First, it is a textbook principle of prudent fiscal policy that budget deficits are appropriate in times of war and recession,” Mankiw said. He added that the nation should not “insist on budget balance in difficult times.”
While this is a fair point, Mankiw appears to leave out some key details. These are difficult times with expensive crises — some of our choosing (Iraq) and others not (Afghanistan). Yet, while most can agree deficits may be necessary when addressing emergencies, the controversial part that Mankiw conveniently forgot about is the massive tax cuts for the wealthy.
Wars are expensive and can cause deficits, but that’s exactly why no U.S. president, from either party, has ever tried to wage a full-scale war and pass a large tax cut at the same time — until Bush. Lincoln raised taxes to pay for the Civil War. McKinley raised taxes to finance the Spanish-American War. Wilson raised the top income tax rate from 7% to 77% to afford WWI. Taxes were raised, multiple times, to help the nation pay for WWII, Korea, and Vietnam. Even the first President Bush raised taxes after the first war with Iraq to, you guessed it, keep the deficit from spiraling out of control.
If this President Bush was running a small deficit after dealing with foreign wars, it would be understandable, maybe even expected. It’s incomprehensible, however, to ram huge tax cuts for the wealthy through Congress when the deficit is already rising and we’re struggling to afford our military efforts. For Mankiw to leave this little detail out is a sin of omission.
“Second, the deficit must be evaluated relative to the size of the economy,” Mankiw said. He added that the deficits have been bigger in terms of percentage of GDP. This is accurate, to a certain extent. In the early 1980s, Reagan ran deficits that constituted 6 percent of GDP, the highest percentage ever. By contrast, the current deficit is 4.2 percent of GDP, which is obviously better.
But Mankiw didn’t mention that today’s $455 billion deficit includes the Social Security surplus — which Bush, in the 2000 campaign, promised not to touch if elected. If we looked at the deficit without counting the Social Security surplus, the deficit would be 5.7 percent of the economy, the second-highest percentage since WWII.
Moreover, Mankiw leaves out another key piece of information. What happened after the deficit reached 6% of GDP in the early 80s? Reagan raised taxes — six times — to help keep the deficits more manageable. Bush, meanwhile, plans on fighting for more tax cuts every year for the rest of his presidency.
“Third, under the president’s proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008,” Mankiw said. “The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending.”
This is easily the least substantive of the three points, and therefore the least persuasive. Mankiw is simply assuming that the Bush administration’s fiscal policies will make the economy grow, yet at this point, none of the administration’s economic proposals have produced the desired effect, so frankly, I’m not sure why Mankiw is so optimistic.
And Mankiw is counting on “restraint in the growth of government spending”? That’s great, professor, but what exactly will your boss be cutting? After all, Bush is pushing for an expensive new prescription drug benefit for Medicare, increased defense spending, and more tax cuts. How, exactly, will this make the deficit shrink? Oddly, Mankiw doesn’t say.
I can appreciate that being the chairman of the White House Council of Economic Advisors with this president can’t be easy — defending the indefensible, after all, must be tricky — but deficits do matter. Obviously, this administration has dug us into a terrible hole. If this op-ed is any indication, the administration is going to have to do a lot better at explaining how they’re going to get us out of it.