Submitted by Douglas Green, Jul 12, 2007 16:58

Over an economic cycle, we would expect a deficit at the beginning of the cycle to fall in both absolute and in relative terms. This is a pattern that goes back to 1945. Comparing the Bush deficit, currently, at the end of a business cycle to those at the beginning of Clinton's term, which occurred at the beginning of a cycle, is intellectually dishonest. Also - It was not until 1994 that the Clinton budget was fully in place. In 1992, George Bush was still president. FY 92, and FY 93 were all passed under Bush I. Clinton passed his tax increases and his first budget in 1993, for 1994. By the end of the Clinton administration we were in surplus. As Bush winds down, we are still in deficit.

The underlying question is: are tax cuts financed by deficits the only way to grow the economy. In 1993 Clinton passed the "largest tax increase in the history of history". The supply-siders said this would cause a recession. Taxes were raised and a recovery followed, one that surpassed the one we have to date had.
In parallel, the new Bush administration passed a tax cut. And we have had recovery since then as well. But in most years, and in most months, the rate of borrowing exceeds the rate of growth. In other words we have not gotten a dollar of growth for a dollar of borrowing.

Small marginal tax cuts are not related to economic growth.

You can raise taxes and you can cut taxes, but growth will occur for reasons unconnected with small changes in marginal rates. In other words if Bill Clinton had never raised taxes, and had Bush not cut taxes, we would have had the same recovery.

How deficits matter is in the very long term. We now have a very leveraged economy, having borrowed from abroad, not to wage war, and not build structures, but basically to consume and to bid up real estate prices, neither of which adds to the economy's underlying productive growth.

In simple terms- the old time conservatives were right. Fiscal policies don't amount to darn thing in macro-economic terms, but they can hamper long term growth. Don't tinker and balance the budget used to be the watchword of conservatives. It should be again.

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