commissioner.org
| Source | Louis Proyect |
| Date | 04/05/13/00:30 |
| NY Times, May 11, 2004
By ROBERT B. REICH WALTHAM, Mass. ? If soaring deficits are such a big problem, why haven't long-term interest rates also risen? Could it be that John Kerry is wrong when he says that the Bush administration's deficits threaten to become a "fiscal cancer that will erode any recovery and threaten the prospect of lasting prosperity" ? and Dick Cheney was right when, according to former Treasury Secretary Paul O'Neill, he said that "deficits don't matter"? It's unlikely. The more plausible explanation has more to do with politics than economics: the parties have reversed roles, or at least perceptions of them have changed drastically. The Democrats have become the eat-your-spinach party, preaching the virtues of fiscal restraint, while Republicans invite Americans to a free lunch. The evidence is compelling. In the last three years, upper-income Americans have been treated to vast tax cuts, with promises of more, while government spending has ballooned. This year's deficit, according to the White House's latest estimate, will be a record $521 billion ? an estimated 4.2 percent of the total economy. If President Bush succeeds in making his tax cuts permanent, future deficits will be much larger. According to most mainstream economists ? and the stock market, which yesterday dropped below 10,000 for the first time in six months ? a day of reckoning awaits. No less an authority than Alan Greenspan, chairman of the Federal Reserve and a former enthusiast of the Bush tax cuts, has warned that the deficits pose "a significant obstacle to long-term stability." The Fed is now widely expected to raise short-term rates at its meeting next month, and the yield on 10-year Treasury notes has been inching higher. But if the market were behaving rationally, long-term rates would already be far higher in anticipation of an interest-rate crunch. Who in their right mind would lend dollars today, to be repaid in 3 or 5 or 10 years, without insisting that debtors pay substantial interest? John Kerry's economic plan ? rolling back the Bush tax cut for people earning more than $200,000 and re-establishing strict rules requiring that any new spending be offset with other spending cuts or new revenue ? is based on this view. Yet so far, the vast increase in government borrowing hasn't affected long-term rates that much. Capital markets do not always behave rationally, of course. Perhaps bond traders just aren't paying attention to the gathering storm. Maybe they've been distracted by the Fed's low short-term rates. Maybe they're Republicans. Another explanation is more consistent with economic and political rationality. Bill Clinton, and now John Kerry, have taught the bond traders on Wall Street an important and comforting lesson: no matter how big deficits grow under Republican presidents, eventually a Democratic president will come along to clean up the mess. That confidence is helping to keep long-term rates down, despite the current out-of-control deficits. More than a decade ago, the federal deficit was more than $300 billion ? about 5 percent of the economy. President Bill Clinton and Congressional Democrats reversed this profligate trend by slashing spending and raising taxes. The strategy was hard to swallow, and not at all popular ? not a single Republican member of Congress voted for Mr. Clinton's 1993 budget. Some of us in the president's cabinet thought he had gone further than he needed to; there was too little money left for education, job training and health care. But there is no disputing that the plan had the intended effect. Deficits that had ballooned under Ronald Reagan and George H. W. Bush were brought firmly under control. Bond traders breathed great sighs of relief. Wall Street beamed. Mr. Kerry has wisely and responsibly decided to take the same route. If he becomes president next January, he will inherit a budget mess not unlike that which Mr. Clinton inherited. And Mr. Kerry has already committed himself to following Mr. Clinton's lead and imposing fiscal restraint. He has scaled back some of his more ambitious spending plans, and has somberly told his Democratic audiences that the country must get its fiscal house in order before addressing the larger needs of society. Undoubtedly, Mr. Kerry's resolve has contributed to the bond traders' calm. In the event that Mr. Kerry is not elected and President Bush gets a second term, the fiscal picture will become substantially worse. But bond traders will still take comfort in the knowledge that another Democrat will eventually come along to fix it. You see, Democrats and Republicans are engaged in the economic equivalent of Nixon going to China: Republican presidents can get away with utterly irresponsible fiscal policies because there's no one to their right who will make too much trouble for them. Democratic presidents can get away with fiscal austerity because there's no one to their left who will make their life too difficult. But the irony should not be missed. John Kerry's promise of fiscal responsibility might just save George Bush's presidency. |
Copyright (c) 1998, Joongpil Cho