Analysts fault Bush, Kerry economic plans

Author: Robert Gavin

Published: October 12, 2004

A burgeoning federal deficit is again an issue in the presidential campaign, and one that almost certainly will overshadow the next administration and the nation's economic prospects. But neither candidate has a credible plan to address the nation's exploding debt, economists and analysts say.

In fact, analysts say, the key budget proposals of President Bush and Senator John F. Kerry will only make it harder to solve a long-term shortfall estimated in the tens of trillions of dollars.

Bush would extend the broad array of tax cuts passed in his first term. Kerry would limit those tax cuts to families making less than $200,000 a year, but spend the money gained from raising taxes on the wealthy, primarily by expanding health care programs to lower insurance premiums and cover the uninsured. Either way, according to independent analyses, the cost is the same: at least $1.2 trillion over 10 years.

''We have a fire approaching our house, and all they're doing is throwing gasoline on it," said Leonard E. Burman, senior fellow at the Urban Institute, a nonpartisan Washington think tank. ''We can't control our spending, and we keep cutting taxes, and that's a recipe for disaster."

Policy analysts say it is no surprise Bush and Kerry are skirting the harder realities of deficit reduction, because they ultimately entail politically unpopular steps such as raising taxes, slashing spending, and revamping entitlement programs such as Social Security. After all, the last party nominee to run on raising taxes, former Vice President Walter Mondale, lost 49 of 50 states to President Ronald Reagan in 1984.

While Bush and Kerry have certainly avoided the tougher questions on deficit reduction, they have not completely ignored the issue. Each has at least articulated an approach to the deficit that underscores the philosophical divide -- one that might be summed up as ''Reaganomics" vs. ''Rubinomics."

Kerry views lowering the deficit as vital to sparking economic growth, embracing the views of Robert Rubin, former Treasury secretary who persuaded President Clinton to follow such a strategy. Rubin, a Kerry adviser, argues that cutting deficits and subsequently reducing government borrowing lower long-term interest rates, which in turn help fuel business expansion.

Bush, however, sees economic growth as the prerequisite to deficit reduction. He has made big tax cuts the centerpiece of his budget policy, echoing President Reagan's ''supply side" arguments that lower taxes produce additional economic activity to offset revenue losses.

Gary Blank, the Bush campaign's deputy policy director, said the president is not a classic supply sider, in that he believes other policies such as reducing regulations and improving education are also needed to boost the economy. But, Blank added, ''If we try to raise taxes to balance the budget, that would hurt the economy. You can't balance the budget with a weak economy."

The return of deficit politics is a reminder of how dramatically the nation's fortunes have changed from five years ago, when federal budget agencies projected more than a decade of surpluses. Instead, the federal government has rung up nearly $1 trillion in cumulative deficits in the last three years, and is on track to more than double that figure, to $2.3 trillion, over the next decade, according to government projections.

Big tax cuts and big spending created the deficits, analysts say. Bush not only engineered tax cuts with a 10-year price tag of nearly $2 trillion, but also boosted federal spending by 20 percent, 19 percent excluding defense, according to administration estimates.

Bush also signed into law the biggest Medicare expansion since the program's creation: a prescription drug benefit. The new benefit is responsible for nearly one-third of Medicare's projected $28 trillion shortfall over the next 75 years, according to program trustees.

Bush administration and campaign officials blame external forces for the ballooning deficits, particularly the 2001 terrorist attacks that launched the war on terror, including the invasion of Iraq, and drove the nation deeper into recession. Ultimately, the massive tax cuts and surge in federal spending helped lift the economy, according to economists, and now that it is expanding, Bush is turning to the deficit, his advisers said.

In his current budget, Bush virtually freezes the overall growth of domestic spending, excluding Social Security, Medicare, and other mandatory programs. The combination of restrained domestic spending and projected economic growth should cut the deficit in half by 2009, according to administration estimates.

Kerry's plan is similar. He, too, would cut the deficit in half in the next term by restricting spending on discretionary domestic programs and relying on a growing economy to generate taxes faster than the government can spend them. He has proposed stricter budget rules than Bush to keep the lid on the deficit, applying them to tax cuts as well as domestic spending. Bush excludes tax cuts from his budget limits.

Economists, however, say this approach will have little impact on long-term deficits. Discretionary programs subject to proposed spending caps are a small part of the budget, while rules to control mandatory programs such as Social Security and Medicare apply to new initiatives, not built-in costs poised to explode.

Before the end of the next presidential term, analysts warn, the first of the baby boom generation will retire, beginning a demographic wave that threatens to overwhelm the nation's finances. Social Security alone faces a $5.2 trillion funding gap over the next 75 years -- one that would require an immediate 15 percent increase in Social Security payroll taxes to fill, according to program trustees.

Medicare, the health insurance program for the elderly and disabled, faces a far worse shortfall: a staggering $28 trillion. Big deficits, meanwhile, could spell big trouble for the economy. As government borrowing expands to cover the debt, it siphons money from private investment, pushes interest rates higher, and drives up costs for business and consumers, according to economists. The result is slower economic growth -- or worse.

Federal Reserve Chairman Alan Greenspan recently warned in congressional hearings that sustained deficits could spiral into ''stagflation," the vicious cycle of high inflation and stagnant growth that choked the economy in the 1970s.

''The need to make stark choices among budget priorities will again become pressing," Greenspan told the House Budget Committee.

Neither Bush nor Kerry, however, is addressing the ''stark choices," which, in addition to increasing payroll taxes for Social Security and Medicare, could include raising the retirement age and lowering benefits, analysts say.

Kerry, in fact, has vowed not to boost the retirement age or lower benefits in Social Security and Medicare. He argues that the Social Security trust fund would not run out of money until 2042, and through economic growth, spending discipline, and, if necessary, modest bipartisan reforms, the nation can come up with the money to keep it solvent. His approach to saving Medicare, which is projected to exhaust its trust fund by 2019, would be similar, said Jason Furman, a Kerry economic policy adviser.

Bush has suggested a concept for Social Security reform: allowing younger workers to invest some of their Social Security taxes in exchange for lower government payments at retirement. But he has not proposed any specifics for creating private investment accounts, including the age of workers who would be able to invest or how to pay the transition costs of making such a change, estimated to be at least $1 trillion. Bush has not proposed changing the retirement age.

''People are living longer, health care costs are going up at double digit rates, and there's not a solution in sight," said Isabel Sawhill, senior fellow at the Brookings Institution in Washington. ''The candidates are only talking about the next five years, and the next five years are not where the problem is. We need to do painful and politically unpopular things."

With only a few weeks left in the campaign, analysts said, do not expect candidates to deal much with either the painful or the unpopular. So, for voters concerned about the deficit, the decision could well come down to which candidate they believe is most likely to break his promises.

Recent history shows that significant deficit reduction has come only when the eventual winner abandoned campaign pledges, notably the first President Bush, who broke his ''read my lips" promise not to raise taxes, and Clinton, who backed out of his promise to cut middle class taxes.

In many ways, analysts say, the situation is more urgent than the early 1990s. Not only is the retirement of the baby boomers imminent, but the ''peace dividend" -- the reduced defense spending that followed the end of Cold War -- is evaporating as the nation fights the war on terror. That will leave the next president with even less room to maneuver.