Oh, That Deficit

Why the Democrats ignored Bush’s fiscal folly.

Ignoring it is bliss
Ignoring it is bliss

I expected there would be a concerted effort to ignore the train wreck that has been the Bush administration’s fiscal policy at a political convention this summer.

I just didn’t expect it at the Democratic Convention.

Keynoter Barack Obama never mentioned fiscal policy. The only national debt vice presidential nominee John Edwards spoke of Wednesday night was Iraq’s. Last night, Clinton-era fiscal talisman Robert Rubin was seated next to Teresa Heinz Kerry. But Kerry’s nomination speech contained little in the way of Rubinomics. Kerry did mention that “When I came to the Senate, I broke with many in my own party to vote for a balanced budget.” And he did promise a “return to fiscal responsibility” by offering a plan to “cut the deficit in half in four years” and by reinstituting pay-as-you-go budgeting. But that was it.

There are three possible reasons for the Democrats’ seemingly conscious effort to avoid direct criticism of Bush’s fiscal follies.

The first is that the Democrats have swallowed the Republican line that the deterioration of the nation’s balance sheet was more a matter of happenstance than human agency. The recession and stock bust sapped revenues and necessitated tax cuts while the war on terror required higher spending, thus rendering all those forecasts of surplus inoperative. But that’s not how it went down. As Daniel Altman convincingly argues in his new book, Neoconomy, the administration’s efforts to remake American fiscal policy have been just as radical—and just as calculated—as its efforts to remake foreign policy. The Neoconomists, led by the dour supply-sider Lawrence Lindsey and the more cheerful (and shameless) Glenn Hubbard, possessed of “a revolutionary mindset,” used the forecasts of a surplus as an excuse to restructure the tax code. Their goal was to eliminate or sharply reduce taxes on savings and investing and instead finance government activities by taxing wages. So marginal tax rates were cut on the wealthy, the estate tax was slated for elimination, and taxes on dividends and capital gains were slashed. The result: hundreds of billions of dollars of the Social Security surplus spent, hundreds of billions in extra debt, subpar job growth, and structural deficits as far as the eye can see.

And they’re not done yet. If the Neoconomists have their way, Altman concludes, “All your income from working would be taxed” while “none of your income from other forms of saving would be taxed.” That’s a huge relative advantage for those with enough assets to invest and live off of savings and a huge relative disadvantage for people who haven’t yet made it. Two Americas, anyone?

One quibble: Altman portrays the Neoconomist revolution as having been accomplished by stealth. But it was all out in the open from the outset. It’s just that the financial and political press were unequipped to deal with the Bush economic team’s disingenuousness and willfully rosy projections. It’s only now, when the woeful results are evident, that the neo-econs are hiding. (There should be a reward for the first person who spots Council of Economic Advisers Chairman N. Gregory Mankiw or National Economic Council head Stephen Friedman in public.)

The second potential reason not to put fiscal policy front and center is that it’s political anesthesia. But there’s some evidence that fiscal profligacy is resonating in this campaign season. Exhibit A: Peter G. Peterson’s Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It, debuted at No. 13 on the New York Times best-seller list. The former Nixon Commerce Secretary, Concord Coalition founder, and Blackstone Group co-founder has long been a deficit scold. But the book-buying public has snapped up his bitter denunciation of Republicans—and somewhat less bitter denunciation of Democrats.

Peterson has some great sound bites. “No matter which taxes are reduced, and no matter how far, Bush’s economic team is inclined to believe—and of course his political team agrees—that reducing them till further will ultimately raise more revenue. … This tax cut ideology is not fact-driven. It is faith-driven.” Or this: “In sum, this administration and the Republican Congress have presided over the biggest, most reckless deterioration of America’s finances in history. It includes a feast of pork, inequitable and profligate tax cuts, and a major new expansion of Medicare that is unaccompanied by any serious measures to control its exploding costs.” Didn’t Bob Shrum get the galleys? Besides, the title fits in perfectly with the Kerry campaign’s predilection for 1970s-era rockers. How cool would it have been to have Jackson Browne jamming while the silver-haired ex-Republican grandee took the stage?

The third reason is potentially more worrisome. Perhaps the Kerry-Edwards team believes it’s not worth highlighting the Bush fiscal mess because the electorate can’t or won’t grasp the notion that huge deficits today mean higher interest rates, higher taxes, and lower growth and lower government spending tomorrow. Or perhaps some Democrats still assume that when you pit the difficult work of deficit reduction against the siren call of tax cuts, the latter will always win. So far, the Kerry economic case is resting on the middle-class squeeze and the failure of the Bush-Frist-Hastert economy to generate—or retain on these shores—adequate numbers of good-paying jobs. The difference between these two arguments—the simple one about jobs and the more complicated one about the deficit—is the difference between Bob Shrum and Bob Rubin. Who would’ve thought that the populist Kennedy hand would be more economically condescending than the former chairman of Goldman Sachs?

Meanwhile, the Bush administration continues to provide ample reason to highlight the twin perils of higher deficits and false promises on growth. Today, as Kerry and Edwards broke camp, the Office of Management Budget projected a record fiscal 2004 deficit of $445 billion. The Commerce Department, meanwhile, reported that gross domestic product rose at a disappointing 3 percent annual rate in the second quarter.