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Deficit Danger Zone in View

January 28, 2002

When President Bush entered office, he seized upon the projected $5.6-trillion surplus to ram through sweeping tax cuts. Now the Congressional Budget Office and the White House are projecting that the United States will be in the red for the rest of Bush's term. In 2002 alone the White House estimates that the deficit will be $106 billion, whereas it projected a $231-billion surplus last year. Is this cause for alarm?

Not yet. Running a deficit in either a recession or a war is a time-honored practice. The U.S. currently finds itself in both.

Even though Congress and the White House failed to agree on a stimulus package, the spending increases that the administration is proposing for defense and homeland security will almost surely boost the economy. So don't panic. But do be concerned at the administration's cavalier approach to entering this economic danger zone.

White House Budget Director Mitchell E. Daniels Jr. observed that this year's budget numbers can "oscillate wildly." But the overall trends are disturbing--and, in part, the result of the administration's tax cut program. In 2002 alone, these cuts have cost the government $38 billion in revenue. Add to that losses from lower capital gains tax revenues resulting from the stock market's doldrums and the budget really starts to get squeezed.

No, it's not economic Armageddon. But it's not good. For one thing, it appears the administration will be forced to tap Social Security funds to finance other programs. Worse, deficits directly punish lower-income Americans by drying up jobs.

In the Clinton era, Federal Reserve Chairman Alan Greenspan was able to keep interest rates low because the federal government was practicing fiscal restraint. Lower interest rates translated into cheaper borrowing costs for businesses and played a big role in bringing unemployment to historical lows. Testifying before the Senate Budget Committee on Thursday, Greenspan said the disappearance of the budget surplus was pushing up long-term interest rates and slowing economic growth. He called on Congress to make future tax cuts or spending increases dependent on progress in reducing the national debt.

The White House should listen, before its stubborn refusal to delay or cancel its planned tax cuts fritters away everything it inherited from Clinton.

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