- The Washington Times - Wednesday, March 5, 2003

With the nominal budget deficit virtually certain to exceed the $300 billion level for the first time in history, it is understandable that the deficit has returned as a focal point in American politics. It is also understandable that Democrats have been feverishly seeking to exploit it for whatever political advantage they think they can garner. Keep that strategy in mind when Democrats attempt to trump the president's 10-year, $400 billion Medicare prescription-drug proposal with a counteroffer that will almost certainly be at least twice as costly. So, a dose of perspective seems in order.

Measured as a percentage of total economic output, or gross domestic product (GDP), a $300 billion deficit represents 2.7 percent of GDP. From an historical point of view, consider the 20-year period from 1975 through 1994 i.e., before the stock-market bubble began generating huge, unanticipated revenue streams that first eliminated the existing deficit and then produced the surpluses later in the decade. In only one year (1979) during the 1975-1994 period did the federal budget deficit, measured as a percent of GDP, fall below 2.7 percent.

As this page has previously pointed out, relative to the economy the size of today's deficit is significantly smaller than previous deficits at comparable periods in the business cycle. Following the 1990-91 recession, for example, the 1992 budget deficit (4.7 percent of GDP) would exceed $500 billion in current dollars. Similarly, following the 1981-82 recession, the 1983 deficit (6 percent of GDP) would exceed $675 billion in current dollars.

In addition, for all the blame for the deficit's re-emergence that critics want to ascribe to President Bush's 2001 tax cut, it is important to understand just how gigantic the stock market's bubble-related revenue streams truly were. From 1994 to 2000, revenues from individual income taxes (thanks in no small part to capital gains and stock-options profits) nearly doubled. Those taxes soared from $543 billion in 1994 to more than $1 trillion in 2000 as the Nasdaq composite index ballooned from 750 in 1994 to more than 5,000 in 2000. After the market peaked in 2000 and then began its descent, revenues from individual income taxes in 2002 were $146 billion lower than in 2000. Congress' Joint Committee on Taxation estimated that less than $40 billion of this $146 billion revenue difference was attributed to Mr. Bush's tax cut.

It also bears repeating that Mr. Bush inherited an economy in which growth was negative not only during the first quarter of 2001 but during the two subsequent quarters, as well.

Finally, with war against Iraq seemingly imminent, Democratic deficit-mongers deserve to be reminded that much of the progress against the budget deficit during the Clinton-Gore administration came at the expense of national-defense spending, whose share of GDP plummeted by nearly 2 percentage points, or more than $200 billion per year in current dollars. Suddenly, the current deficit picture doesn't seem so extreme, under the circumstances.

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