Much of the debate in the 2000 presidential campaign came over what to do with the surplus: Al Gore wanted to spend some of the money on programs and, astonishingly, to pay off the national debt (Alexander Hamilton's lessons on the need to maintain a national debt apparently having been forgotten); George W. Bush wanted to cut taxes. Bush won and cut taxes; the September 11 attacks exacerbated a mild recession and produced far higher outlays on defense and homeland security; the Republican Congress (with Democrats in the majority in the Senate for 18 months) exercised much less fiscal discipline than it had when Clinton was president. The 2001 surplus of $128 billion turned into deficits of $158 billion in 2002, $378 billion in 2003 and $412 billion in 2004.
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In my own political migration from left to right, I have retained the same views on several issues: immigration (generally in favor), the general thrust of foreign policy (America is a force for good in the world), and federal budget deficits (they don't much matter). I noticed that the deficits of the 1960s and of the 1980s produced in part by the Kennedy and Reagan tax cuts seemed to result in low-inflation economic growth. Every large organization carries debt and, as Hamilton understood, should do so, in order to maintain its capacity to borrow: If the federal government has debt, so does General Electric. The important question is not whether an organization has debt but whether it can service the debt at reasonable cost. There was an argument that debt service was getting too expensive for the federal government in the late 1980s and early 1990s, when budget deficits peaked at 6.0 percent of gross domestic product in 1983 and 4.7 percent in 1992 (although the deficits of the early 1990s, as noted, were inflated by the savings-and-loan crisis which was inherently temporary and nonrecurring). But the deficits in this decade were a much smaller share of GDP, peaking at 3.6 percent in 2004. The currently projected deficit of $333 billion for 2005 seems likely to be under 3 percent of GDP, a level at which the debt has proved readily serviceable over the years.
Why has the deficit declined so rapidly this year? The simple answer is that outlays seem to be increasing by about 7 percent but receipts seem to be increasing by about 15 percent. The Bush tax cuts, like the Reagan and Kennedy tax cuts, seem to be resulting in much more buoyant increases in receipts than the Clinton tax increases did: Just look at the numbers. The scoring system used by Congress and OMB in projecting revenues is static; that is, it assumes that tax increases and tax cuts have no impact on economic activity. But obviously they do: Tax increases reduce economic activity and tax cuts increase it. Conservatives have been calling for dynamic scoringscoring that takes into account these effectsfor years, in vain. They have been frustrated by the one intellectually serious argument against it, that no one knows exactly how much tax increases and tax cuts influence economic activity. Maybe that's a good argument. But observers, journalistic and otherwise, should not be so surprised when tax cuts result in a gusher of receipts, even if the economists can't tell us with certainty how big that gusher will be. And our recent history of deficits and surpluses should leave us unsurprised when a deficit level that everyone says will be eternal proves to be evanescent. Just use a little common sense.