Posted on: Monday, January 12, 2004

EDITORIAL
Soaring deficit a sign of fiscal recklessness

Mature Americans understand what happens when they run up credit card debt. Those who don't, the "I want what I want when I want it, and I want it now" crowd, blind themselves to the financial disaster they are courting in the name of instant gratification.

So it is with the downright alarming trajectory of the national debt, which has just passed $7 trillion and is on course to reach $5 trillion more in the next 10 years. Last year's debt service cost 18 percent of federal revenue.

At President Bush's urging, the Republicans in Congress have accelerated tax cuts that largely benefit the rich, and now promise to make them permanent. At the same time, however, spending for a more difficult than anticipated war, or wars, and permanent addition of a drug entitlement to Medicare suggest that deficit spending is out of control.

Meanwhile, 77 million baby boomers contemplate retirement in this decade, prompting predictions that Social Security and Medicare are headed into the red to the tune of tens of trillions of dollars.

A chorus of credible voices grows increasingly shrill, including the Congressional Budget Office, nonpartisan groups like the Concord Coalition and the International Monetary Fund, warning that the growing U.S. debt jeopardizes global financial security.

A paper presented to the American Economic Association by Robert Rubin, former Treasury secretary, Peter Orszag of the Brookings Institution and Allan Sinai of Decision Economics highlights the potential for catastrophe — an Argentina syndrome, with exponentially greater consequences.

What these three respected economists say in essence is that our country's huge budget and trade deficits won't alarm investors as long as they believe that fiscal policy is under shrewd and prudent management.

When international investors perceive that the Bush administration's assurances that the American deficit will be cut in half over the next five years are so much wishful thinking, however, then things may get ugly.

"Financial markets give us the benefit of the doubt," writes Princeton economist Paul Krugman, "only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared."

With a Congress unable to cut spending and a White House that wants to make tax cuts permanent, the risk of fiscal meltdown at home and abroad grows large.