|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
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
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
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.