- The Washington Times - Saturday, July 19, 2003

The Bush administration released its mid-session budget review Tuesday, reporting that the fiscal 2003 budget deficit, which less than five months ago was estimated to be $304 billion, would now exceed $450 billion. The forecast expects the deficit to rise to $475 billion in 2004, after which it is expected to decline to $304 billion in 2005 and $226 billion in 2008. Even by the elastic standards of budget revisions of the past, the 50 percent increase in both the 2003 and 2004 deficits was eye-popping, if not entirely unexpected.

In nominal terms, which congressional Democrats emphasized, the projected 2003 deficit of $455 billion will set a record, surpassing the previous mark of $290 billion established in 1992. However, in relative terms, comparing the size of the deficit to the economy, the 2003 deficit will not be nearly as dreadful as its nominal size implies. At 4.2 percent of gross domestic product (GDP), or total economic output, the 2003 deficit will still be substantially lower than the 1983 budget deficit of 6 percent of GDP. Measured by percent of GDP, it will be smaller than six budget deficits over the previous 20 years.

Nevertheless, the revised deficit forecast of $455 billion for fiscal 2003 undeniably represents a stunning reversal from the 2003 baseline surplus of $334 billion, which was projected in early 2001 as part of the $5.6 trillion in cumulative baseline surpluses from 2002 through 2011. That represents a change of $789 billion for a single year.

In an interview Tuesday afternoon, former Harvard economics professor N. Gregory Mankiw, who just recently became chairman of the White House Council of Economic Advisers, was asked if he could have contemplated such a massive fiscal reversal three years ago, when the consensus forecast projected surpluses as far as the eye could see. Widely acclaimed as one of the leading academic authorities on fiscal and monetary policies, Mr. Mankiw replied that what he had not contemplated was the series of overlapping contractionary shocks that have hammered the economy over the past three years.

Among these shocks, Mr. Mankiw included: the collapse of the stock-market bubble, which has significantly reduced individual income tax revenues and destroyed trillions and trillions of dollars of wealth; the terrorist attacks of September 11; the corporate-governance scandals, about which Mr. Mankiw was too magnanimous to note that virtually all of them (e.g., Enron, Global Crossing, WorldCom, Adelphia, Xerox, Tyco, Arthur Andersen) flowered during the Clinton-Gore administration; and the war in Iraq. The fact that the economy had begun a three-quarter contraction during the first quarter of 2001 had not been contemplated when the now- famous $5.6 trillion surplus projections were made, either.

Democrats have been relentless in their efforts to blame the Bush tax cuts for the $789 billion fiscal reversal for 2003. But the facts simply do not support the charges. In fact, the three tax cuts passed during the Bush administration account for only $177 billion (or 22 percent) of the $789 billion change in fiscal direction for 2003. And those tax cuts surely provided a countercyclical boost to a lagging economy that would otherwise have undoubtedly performed even more poorly in recent years.

War, homeland security and other enacted legislation represent another $193 billion, or 24 percent, of the fiscal reversal. By far the largest factor contributing to the change in the 2003 surplus estimate relates to so-called “economic and technical re-estimates.” These include a much weaker economy than predicted and the attendant impacts upon outlays and revenues, particularly individual income taxes. Altogether, these re-estimates account for $418 billion (or 53 percent) of the $789 billion change for fiscal 2003. In the wake of the stock-market collapse, expected tax revenues from capital gains, stock options and other market-related revenue gushers never materialized. That foregone revenue dwarfs the revenue attributed to tax relief, and no amount of Democratic disingenuousness can alter that fact.

The past three years or so of economic policy, Mr. Mankiw observed, have represented a “tug of war” between contractionary shocks, on the one hand, and monetary and fiscal policies pursued in response, on the other. While the near-term deficits are “larger than we would like,” Mr. Mankiw emphasized, they nonetheless represent “textbook fiscal policy” in response to the “lingering effects of recession.” Again, he was too nice to note that the Bush administration inherited this problem as well.


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