Disappearing Deficits: The Success of American Economic Policy Under George W. Bush

Thursday's New York Post argued that President's Bush's pro-growth economic policies have been vindicated by current federal tax receipts, which have reduced the federal deficit to today's $247.7 billion from $520 billion two years ago. This windfall surge in revenues has been ignored by Democrats, who continue to attack the Bush tax cuts as creating "record deficits as far as the eye can see":

Really?

A recession was already under way when Bush took office in 2001, and 9/11 severely damaged the economy (especially in New York).

But then came the tax cuts - and swiftly the economy was growing at a 4 percent annual clip.

Some 6.6 million new jobs were created since 2003 - and unemployment has practically hit rock bottom.

In 2004, desperate for something negative to grab onto, Democratic presidential candidate John Kerry complained about how the new jobs paid paltry wages.

Wrong again.

Employee compensation has been rising steadily since 2003, and in the second quarter of 2006, it grew faster than the rate of GDP growth for the first time since 2001.

Now the only thing left for Democrats to complain about is the budget deficit. (See above, Rep. Maloney.)

Or listen to House Minority Leader Nancy Pelosi: "President Bush's economic policies have resulted in budgets [that] are drastically out of balance and a skyrocketing debt."

Disregard momentarily that deficits are a product of spending, not revenue - which, incidentally, has grown $521 billion in the last two years alone.

Then consider that the deficit has been in steady decline all year.

In January, the federal Office of Management and Budget was projecting a $423 billion deficit for the current fiscal year. Last week, that projection was revised to $247.7 billion - around 1.92 percent of GDP.

That's well below the 40-year average deficit of approximately 2.3 percent of GDP.

And consider this: If economic growth were to hold steady, and Congress held spending hikes to no more than the rate of inflation, next year the federal budget would be back in the black.

Alas, Congress has been spending as fast as the checks can be written - increasing the size of the federal budget nearly 50 percent since 2000. (Inflation over that same period averaged just 3 percent annually.)

If Congress keeps spending more than the government takes in, the deficit will remain a club for Democrats to use on Bush's economic policies.

But without those policies - the tax cuts, especially - the country would be looking at trillion-dollar deficits.

Bush's tax cuts have created new jobs, enhanced investment, rejuvenated the stock market and made people wealthier.

Good for him.

Very good for the country.

Deficits politics is to a great degree the macroeconomic version of partisan class warfare. I used to be concerned about federal deficits, especially back in the 1980s when bestselling authors were selling Cassandra-ish warnings on the inevitably disastrous effects of the Reagan administration's fiscal policies (see, for example, Benjamin M. Freidman's, Day of Reckoning: the Consequences of American Economic Policy Under Reagan and After [1988] and Kevin Phillips', The Politics of Rich and Poor: Wealth and the American Electorate in the Reagan Aftermath [1991]).

I don't worry about deficits so much any more. It's been demonstrated that tax cuts work to expand the economy and increase budget revenue.

Spending is a problem, of course, as the Post's editorial points out, but to be fair, Bush hasn't been especially restrained on the spending side (especially on Medicare) and he's not been able to move very far with his proposals for Social Security reform. Real progress on the budget will come when the Washington establishment as a whole overcomes its collective action problem and begins to restrain runaway federal outlays on social welfare entitlements.

For more information, see this Wall Street Journal article, which confirms that federal spending is to blame for sustained deficits, as federal spending continues to take up more than 20 percent of gross domestic product.