Deficits Do Matter

Sunday, February 08, 2004 | 08:05 AM


The criticism about the budget deficit from the Right is even stronger than it is from the Left. I guess tales of the death of fiscal conservatism have been greatly exaggerated.

Note that Thomas G. Donlan writes the editorial page of Barron's, and has been a prudent voice of fiscal moderation for many many years. His editorial today notes that what matter isn't just how big the Federal deficit is; Rather, what is of greatest significance is "how we invest borrowed money [that] is [the] key to the economy's future vitality."

Here's an excerpt:

"In Ron Suskind's new book, The Price of Loyalty, former Treasury Secretary Paul O'Neill recalls a run-in he had with Vice President Dick Cheney, in which O'Neill remembers Cheney saying that Ronald Reagan proved that deficits don't matter.

Indeed, inflation declined and the nation turned the corner into a long boom after the reductions in the marginal-tax rates on income that Reagan inspired. But in the next seven years, Congress also raised taxes 13 times in bills that President Reagan signed. The deficits that "didn't matter" were much reduced.

The Reagan years yielded lower marginal-tax rates, reduced tax exemptions and increased payroll taxes. Deficits still mattered, but the productive shift in the burden of taxes offset the deficit's drag, and then some. President Bush's budget offers small reductions in marginal rates to offset the deficit's drag again, but he takes little notice of the need to broaden the tax base and pays no mind at all to increasing payroll taxes to fund Medicare.

Deficits matter, but how we use the borrowed money also matters. Lower tax rates made unproductive tax shelters less attractive, so more capital would flow to useful investments. Reagan's expensive military build-up may have had something to do with the collapse of the Soviet Union. Certainly the boom of the 1990s was sparked in part by the sudden realization that America no longer had military, political or economic rivals, and that its system would prevail.

With enormous expenditures on advanced new weapons to fight non existent armies and air forces, with no tax reform to go with the tax cuts, the Bush deficits won't be invested in America's future. These deficits won't pay dividends in the next decade like Reagan's deficits, and they will matter a great deal."

Note: If you do not have a subscription to the WSJ/Barrons. do your self a favor and get the on-line version. Its relatively cheap, and you don't get any ink stains on your hands . . .

Deficits Do Matter
February 9, 2004
By Thomas G. Donlan,,SB107610966158423346,00.html

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