In its September 19 editorial entitled “Taking Full Responsibility” – an altogether too obvious reference to President Bush’s hurricane mea culpa - the New York Times continued what appears to be a full-court press on Congress to raise taxes in order to pay for the future costs of New Orleans reconstruction. In the view of the Times editorial staff, the economic health of the nation is at stake.
To drive the point home, the Times relied heavily on some rather tired cliches about tax cuts only helping the rich and budget deficits causing interest rates to rise, while swirving in and out of sound fiscal reasoning whenever it was necessary or convenient.
On the one hand, the Times is not opposed to the government borrowing money:
“Don't get us wrong. In the main, it makes sense to borrow for huge, vital and unexpected projects (World War II comes to mind). Such borrowing spreads the immense costs over generations, all of which presumably benefit from the extraordinary spending.”
The Times has not always been a proponent of financing conflicts. Since 2003, it has blamed spending on the war in Iraq for the current budget deficits: “But with war costs escalating and revenues falling as a result of the flat economy, this year's deficit could rise to $400 billion. In fiscal year 2004, it is likely to be higher.”
On the other hand, in its recent editorial, after expressing support for the financing of conflicts, the Times is mysteriously opposed to the consequences of such financing, namely, debt: “The problem is that the United States was deep in hock before Katrina - and for many of the wrong reasons.”
That’s right: We were deep in hock before Katrina – for more than 70 years before. The United States has been consistently in debt since the Depression, and especially since World War II when it annually borrowed more money than was received as income tax receipts. As a result, debt has been a fiscal reality for the U.S. government for seven decades, and has not once prevented the country from spending money in response to an emergency without necessitating higher taxes.
But, the Times had a second caveat: “Unless Congress changes the pre-Katrina priorities laid down by Mr. Bush, necessary borrowing for Katrina will occur on top of unjustified borrowing.”
So, just as there are some wars to be borrowed for, and others that should be paid for while they’re being waged in the Times’ view, there are also caveats to red ink. And, what according to the Old Grey Lady is not the time to borrow? You guessed it: “Cutting taxes for the rich is the most glaring of the wrongheaded reasons to pile debt upon debt.”
Tax cuts don’t create debt; overspending does.
Based on current estimates, the federal government will bring in almost $2.2 trillion worth of income tax receipts in fiscal 2005. This is more than it received during the final stock market bubble year of 2000, and is guaranteed at this point to be an all-time high. If Congress spent the same this year as it did in 2000, there would be about a $400 billion surplus. Unfortunately, spending is estimated to be almost $700 billion more this year than in 2000 - a 39 percent increase. As tax receipts are coming in at a record level this year after two economic stimulus packages, it is devoid of budget acumen to conclude that the projected $330 billion deficit is caused by anything but overspending.
Having gotten to the main course, the Times now evoked a little fear:
“The resulting deficits could create deep economic distress, including higher interest rates, slower economic growth, future tax increases and constraints on the government's ability to be responsive, both to crises and to everyday needs, like health care. Growing deficits also pose a security threat because increasing foreign indebtedness risks eroding the nation's position in the world.”
Deficits don’t lead to higher interest rates
For several decades, economists and policymakers have debated the causal relationship between budget deficits and higher interest rates. As Lawrence Kudlow wrote in the summer 2003 issue of International Economy magazine, “While there may be a link between deficits and rates, it is a very weak link.” Supporting this view is recent history. When Ronald Reagan entered the White House in 1981, the 30-year Treasury bond was paying about 14 percent per year. When he left office in 1989 with significantly higher budget deficits, the 30-year T-bond was paying less than 8 percent.
More recently, as illustrated by this T-bond chart, interest rates actually rose in the budget-surplus years of 1999 and 2000. Yet, as fiscal indiscipline has returned to Capitol Hill along with rising deficits since then, interest rates have not only declined, but to levels not seen in 45 years.
So much for deficits causing interest rates to rise.