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Fair, Not Balanced

The Democrats? jeremiad against budget deficits wins applause, but it?s bad politics and bad economics.

So George W. Bush, like Reagan, came in with a recession. And Bush's tax cuts and military spending increases -- the latter locked in by 9/11 -- followed Reagan's pattern. In 2003-04 Bush signed every appropriation Congress sent up, spending his way out of recession with war and pork. The IMF's chief economist called it the "best recovery money can buy." As always, leading Democrats decried the fiscal irresponsibility. As always, the voters assessed the results. With a narrowly effective Keynesian program, Bush won a narrow victory in 2004.

Still the Democrats have not learned. They remain a party obsessed with budget deficits. The press, if possible, is even worse, screaming at Bush for the one economic crime he did not commit, while ignoring most of the others.

Here's the reality: The budget deficits up to now could not have been avoided. The 1990s boom could not have continued, and any president would have cut taxes and raised spending in the slump that followed. Bush's tax cuts were skewed to the rich -- Republican tax cuts always are. But viewed in the short run, the components of his stimulus package were well sized and well timed.

It's true that the long-term features of Bush's tax cuts are destructive. They benefit a misanthropic plutocracy, transferring tax burdens from the rich to the middle class and from the feds to the states and cities. The proposed permanent repeal of the estate tax, especially, is a social disaster, a blow to the very charities that Bush wants to deliver the social services once provided by government. But while Bush's cuts for the rich should be repealed or allowed to expire, reducing future deficits is not the reason.

What is the cost of running a federal budget deficit? In Kennedy's day economists said "inflation" -- but there was none then, and apart from oil prices there's little now. Today's experts say "high interest rates" -- yet a recent New York Times editorial pronounced long-term rates to be "abnormally low." Alongside many economists, Senator Clinton says that deficits crowd out private capital investment. But the investment share of GDP is currently a full percentage point above its 60-year average. The real costs of this bogey are remarkably hard to find.

The real costs of "fixing it," with immediate tax increases and spending cuts, including to Social Security, are immediate and large. They include falling living standards, rising poverty, reduced medical care, and perhaps a new recession. Recent bad production news suggests that this may not be far away in any case. Large though today's deficits are, dealing with a falling economy could demand bigger deficits, not smaller ones, quite soon.

The real reason to restore the tax code is to generate revenues fairly, giving a future Congress the nerve to address the many problems facing the country, such as energy dependence, global warming, joblessness, health care, education, and homeland security. Every dollar spent on these problems will add to deficits. But solving them is more important than cutting deficits, just as it is more important than preserving tax cuts for the rich.

Finally, there is a little-understood economic point. Budget deficits and the trade deficit are linked; except during deep recessions and explosive booms, they tend to remain approximately equal. The trade deficit has been with us for three decades, and there are only two ways to fix it. We could, of course, abandon free trade, restrict oil imports, and rebuild domestic industry -- a course that would involve steep cuts in living standards and a break with Japan and China (which would prompt them to, among other things, sell their U.S. government bonds). If things went wrong, world depression could result -- maybe world war.

A better way would be to expand exports. But that would require rebuilding the stable world financial system that once funded advanced exports to Latin America, Asia, and Africa. That system was destroyed by the oil shocks of the 1970s and by the high interest rates and debt crises of the 1980s. To rebuild it now would require a very high order of international statecraft, combining trade, aid, debt relief, and financial regulation -- no easy task. Either way, the budget deficit cannot be cured so long as the trade deficit remains as large as it is. Get used to it.

Our problems are large, hard, and expensive. Sure, it's tempting to boil everything down to a slogan. But, let's face it -- in that temptation there's a trap. Whining about deficits has never won an election. That's the best reason for Democrats to stop whining. Who knows? Maybe someday the voters will come to admire them for it.

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