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Economists Divided over Impact of Improved Deficit Numbers

July 11, 2006 at 6:45 PM EST
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RAY SUAREZ: The president doesn’t often announce the latest deficit projections himself, but today he did have some good news to discuss about the nation’s finances.

The deficit, he said, is now expected to be $296 billion for the current fiscal year; that would make the deficit more than $125 billion smaller than initially predicted by the administration. But the new deficit estimate is only slightly lower than what the shortfall turned out to be in reality in the last fiscal last year: $318 billion.

So what to make of the new numbers? We have two views.

Robert Reich was labor secretary in the Clinton administration. He’s currently a professor of public policy at the Goldman School at the University of California, Berkeley.

And Stephen Moore is senior economics writer at the Wall Street Journal and a member of its editorial board. He’s also served as a senior economist on the Joint Economic Committee of the Congress.

And, Stephen Moore, as we look at something as vast as the U.S. economy, with all of its meshing gears and spinning wheels, what can we say the effect is of a smaller deficit, the government having to borrow less money to run its day-to-day operations?

STEPHEN MOORE, Wall Street Journal: Well, I think, for the average American, they’re not going to really feel the impact in their pocketbook of lower budget deficits.

But the one thing that I think — the reason there were so many smiles on the faces at the White House today is I think this lower deficit and the higher revenue numbers are an indication of the growing strength of this economy.

You know, we’ve seen very large increases in revenue by my estimates and now the estimates that came out today. We’re going to see a $500 billion increase in tax receipts over the last two years, which is the largest increase in tax revenues that we’ve seen in this country for two years, adjusted for inflation in history.

So it’s a good news story for the president. I think he’s going to make the case that these numbers show that his tax policies have worked to revive the economy.

Deficit affects president's polls

Stephen Moore
Wall STreet Journal
So the more the president can get this good news out there about how the economy is actually performing, the better. And the one kind of stain on his record on the economy has been this burgeoning deficit.

RAY SUAREZ: So no effect on the average American household, yet the president found it important enough to come out today and make the announcement himself?

STEPHEN MOORE: Well, the problem for the president has been that, although the economic news over the last year-and-a-half has been generally pretty good -- the economic growth rate has been high; we have a low unemployment rate; we've been averaging a pretty good number of new jobs every month, about 150,000 -- if you look at the polls, the American people say, "Well, I'm still somewhat skeptical about the economy."

So the more the president can get this good news out there about how the economy is actually performing, the better. And the one kind of stain on his record on the economy has been this burgeoning deficit.

RAY SUAREZ: Professor Reich, can you give us your analysis on what it matters to rank-and-file Americans whether the government's borrowing a lot of money or not?

ROBERT REICH, Former U.S. Labor Secretary: Well, Steve, I do agree -- Ray, with Steve Moore in the sense that most Americans are not going to know, and they can't really grapple with hundreds of billions of dollars.

Most people don't like the idea of a large deficit -- $300 billion or so a year as far as the eye can see -- but it doesn't have a direct impact on the average family's pocketbook.

Most people, frankly, are concerned about $3-a-gallon gas; they're concerned about health care costs that are soaring, in terms of health insurance; they're worried about college tuitions that are going up faster than inflation.

All of these kitchen-table issues occupy, really, the center stage of most families' concerns about the economy. And the concerns that people have, the reason that the president, I think, is not getting higher ratings on the economy has to do with all of these just common kitchen-table worries.

Small trend in the right direction

Robert Reich
Former Labor Secretary
If you consider that the baby boomers are now much closer to retirement...we don't really yet have nearly the savings we need or the kind of fiscal responsibility we need to deal with this problem.

RAY SUAREZ: Well, are the numbers, would you say, Professor, at least headed in the right direction? If it's true that the government is going to have much less of a gap between what it collects and what it spends, if tax receipts are up, is that at least a trend in the right direction?

ROBERT REICH: Well, it certainly is a trend, and it is in the right direction, Ray, but it's pretty small. I mean, we've been seeing $300 billion-a-year deficits for a long time.

The total federal debt is over $3 trillion, pretty large. And if you consider that the baby boomers are now much closer to retirement -- seven years away from Social Security, the early boomers, five years away from Medicare -- we don't really yet have nearly the savings we need or the kind of fiscal responsibility we need to deal with this problem.

RAY SUAREZ: Stephen Moore, a lot of descriptions of today's deficit numbers talked of a surprising jump in the money collected by the federal government. Well, what was surprising about it? Where is it coming from?

STEPHEN MOORE: Well, we've seen just a gusher of new revenues over the last couple of years. And the interesting part is that the revenues are coming from some of the very areas where President Bush cut the taxes.

So, for example, over the last couple of years, we've seen very large increases in the amount of money coming in from capital gains receipts and dividend receipts. And as you recall, President Bush cut those two tax rates to 15 percent, saying those were a way to pump new steroids into the economy.

Corporate tax receipts are way up. We've seen about a 40 percent increase. And, of course, that's a result of when corporations are more profitable, and, in the last six months, corporations have had record levels of profits. They've paid more taxes on those.

But one other element of this picture that hasn't really been picked up by the media is that, when you also look at state and local governments, which are another big part of our government structure in the United States, they also have record amounts of receipts. And, in fact, a lot of governors are saying, "What am I going to do with all of this money?"

And so the state and localities are going to run $50 to $100 billion budget surpluses in 2006, which will offset some of the borrowing the federal government does.

Cutting taxes increase revenues?

Stephen Moore
Wall Street Journal
This was a point that not only have we made in our newspaper at the Wall Street Journal, but even the New York Times editorial page made this point, that the wealthy are actually paying a higher share of taxes than ever before.

RAY SUAREZ: Professor Reich, do you agree with your economist on the other side of the country that cutting taxes helps increase the revenues down the road on some of these things, for instance, like on stock sales?

ROBERT REICH: Well, there's a very vigorous debate going on around the country, Ray, with regard -- and it's been going on for 20 years -- as to whether supply-side tax cuts really do generate the kind of revenues and the kind of economic growth that Steve Moore is talking about.

These revenues, undoubtedly they are increasing, but whether they are due to the tax cuts of 2001 and 2003 is a very, very different matter. Revenues have not yet caught up to what they were, for example, in the year 2000.

If you go back to the 1990s and Bill Clinton's administration, of which I was a member, very proudly, you see an economic expansion that broke almost all of the records. Although Bill Clinton did raise taxes moderately, he did bring down the budget deficit dramatically. The deficit was finally balanced, and we ended the 1990s with a surplus.

The current administration doesn't seem to be moving nearly as rapidly in that direction, nor on the jobs front. And this is an important part of why average American families are not quite as easygoing about the economy as they might otherwise be.

Jobs have not kept up with the growth in the population. As we saw last Friday, only 121,000 new jobs were created last month. You need about 150,000 to keep up simply with population growth.

RAY SUAREZ: Well, Stephen Moore, taking Professor Reich's point, is there something changing about how the American government collects the money it needs? A lot of this new revenue is coming from corporate taxes, and a smaller overall share is coming from the taxes that individual workers and wage-earners pay on the money they make.

STEPHEN MOORE: Well, actually, the big picture to me, Ray, as I look at this data, is that, when you see where the new revenue is coming from, a lot of the new revenue is coming from rich people, from people in the top 1, or top 5, or top 10 percent of earners in America. They're the ones that are largely paying these capital gains and dividend tax cuts, which calls into question, if this was a big tax cut for the rich, why are the rich paying more taxes than ever?

This was a point that not only have we made in our newspaper at the Wall Street Journal, but even the New York Times editorial page made this point, that the wealthy are actually paying a higher share of taxes than ever before.

Now, the one other element of this report that came out today that we haven't touched on, which is important -- and I think something Robert Reich and I agree on -- is that, although the revenue numbers are good and very healthy, at the same time the spending is still way up.

I mean, there is fiscal irresponsibility in Congress in both parties. So although revenues were up 12 percent, spending was up 9 percent.

Now, part of that was attributable to Katrina. We spent $120 billion to help with the clean-up of Katrina, and that's filtering through the system now. And we're still paying $100 billion a year for the war in Iraq. But domestic spending is also way up, too, and Bob Reich and I, I think, agree on that point.

The president credited his tax cuts

Robert Reich
Former Labor Secretary
And the problem with the sources of the revenues [tax cuts], that is very wealthy people and also corporations, is that they're very uneven sources of revenue.

RAY SUAREZ: Well, today, when making his announcement, Professor Reich, the president credited his own tax cuts from the first administration as being one of those pump-priming maneuvers that resulted in today's enhanced revenues; do you buy that?

ROBERT REICH: Well, I do buy the concept and the idea, Ray, that when you reduce taxes, you initially prime the pump, if you stimulate more spending. But when you cut taxes on the very rich, as most of these tax cuts went to the very rich, you're not going to stimulate the economy very much because the very rich already spend as much as they want to spend.

That's the definition of being wealthy. You spend as much already as you want to spend. So if you get more tax cuts, you're not going to necessarily turn around and spend it.

This was not, and it was never billed as, a pump-priming exercise.

The big debate continues to be whether these tax cuts generate sufficient revenue to cover them and also economic growth. And the problem with the sources of the revenues, that is very wealthy people and also corporations, is that they're very uneven sources of revenue.

From one quarter to the next, from one month to the next, from one year to the next, they vary enormously depending upon what happens to stock prices, what happens to corporate profits, what happens, therefore, to capital gains. It's very hard to assume that revenues will continue at this pace.

And even if they did, given what Steve Moore said about spending -- and I agree with him -- we're seeing deficits that are far too large, given future obligations of this government.

RAY SUAREZ: Professor Reich and Stephen Moore, gentlemen, thank you both very much.

STEPHEN MOORE: Thank you.

ROBERT REICH: Thanks.