Introduction

The United States has run massive budget deficits every year the Bush administration has been in office. The latest budget projections from the White House show annual deficits in the $250 billion range for the rest of the president's term, at which point nearly $3 trillion will have been added to the national debt. In fact, George W. Bush has presided over the biggest fiscal deterioration in American history -- a sorry legacy considering his predecessor left him a healthy budget surplus projected to be $5 trillion over 10 years.

This did not happen by accident. White House officials have repudiated the Clinton administration's view that fiscal responsibility lays the groundwork for sustained economic growth. Often identified with former Treasury Secretary Robert Rubin, this view held that by running massive deficits and borrowing heavily, the federal government drove up the cost of capital. By cutting the deficit, it could bring interest rates down and thereby stimulate new waves of private investment. The economic boom of the 1990s seemed to prove Rubinomics right.

But Republicans have nonetheless rejected that approach. Glenn Hubbard, formerly President Bush's top economic adviser, said in a December 2002 speech: "One can hope that the discussion will move away from the current fixation with linking budget deficits with interest rates." When pressed on the point, he responded: "That's Rubinomics, and we think it's completely wrong." More recently, in an editorial marking the 25th anniversary of Ronald Reagan's inauguration, the conservative Wall Street Journal opined that Rubinomics was a failure, and argued that history had vindicated the supply-side line that tax cuts are the most important policy that government can undertake. Meanwhile, the Bush White House has pointed to higher-than-expected tax revenues in the last two years as further proof that we do not need to worry about fiscal responsibility in the near future.

Times have changed since 1992, and the economic case for fiscal discipline has changed, too. But it remains strong. It is true that the globalization of capital markets in the last 15 years means that America no longer displaces an inordinate percentage of the world's capital when it borrows heavily from abroad. Therefore, the interest rates that the U.S. government has to pay for its massive borrowing are not as high as they might be otherwise. In addition, governments and central banks have helped our situation. Lending countries such as China and the world's oil exporting nations seemingly have been willing to hold U.S. debt even though higher returns might be available elsewhere.

Of course, it is nice to be able to borrow money without having to worry much about the impact on interest rates. But if globalization has made borrowing from abroad easier, it also exacts new penalties for fiscal profligacy. In fact, there are three big reasons why Americans should still be concerned with big budget deficits: (1) they have unfair distributional consequences between generations; (2) they make it harder for our government to respond to fiscal crises; and (3) they subject America's economic well-being to the potential whims of foreign governments and central banks.

Before looking at each of these, however, it is important to address the administration's claim that our current fiscal position is basically healthy. The recently released budgets of the Congressional Budget Office (CBO) and of the president show the government going back into surplus by 2012, which makes it sound as though the problem has been solved.

A closer look at the numbers, however, reveals that the positive news is overstated. The CBO's projections, for example, assume that all the Bush tax cuts will expire; that the Alternative Minimum Tax (AMT) will affect a growing fraction of people earning between $75,000 and $100,000 over the next five years; that federal spending will grow only with inflation, rather than with population or GDP growth; and, most importantly, that the federal government will go on raiding the Social Security trust fund "lock-box." The president, by requesting hundreds of billions of dollars in further tax cuts, has painted himself into such a tight corner that he cannot produce a fiscally responsible budget without leaning heavily on such dubious assumptions. A more realistic analysis shows very significant deficits for at least the next several years, after which the baby boomers' exploding health and retirement costs will make the fiscal picture dramatically worse.

Make no mistake: Deficits still matter. A balanced budget may be less central to economic growth today than in the 1990s. But deficit reduction now functions as a crucial insurance policy against global financial shocks and over-reliance on foreign lenders, as well as national emergencies such as Hurricane Katrina's devastation of the Gulf Coast. It should not be a goal in and of itself -- pain for pain's sake. Fiscal responsibility should be our goal because it remains an important foundation of economic justice and growth.

Here is a closer look at the adverse social and economic consequences of the Bush administration's irresponsible fiscal policies.