NCPA - National Center for Policy Analysis

Worrying About Deficits

January 12, 2004

Fortunately for President Bush, none of those seeking to challenge him in November seem capable of scoring any points against him on the deficit. Also, there is no one running for the Democratic nomination as anIs Federal Spending Profligateother Ross Perot, says Bruce Bartlett.

Although all would rescind Bush's tax cuts to one degree or another, none have said that the additional revenue would be dedicated to deficit reduction. Rather, they would all use the money to cut taxes in some other way or to pay for new government spending, says Bartlett.

Former Treasury Secretary Bob Rubin, who is certainly one of the smartest men in the Democratic Party, knows this, but is calculating that some unforeseen financial event may change the dynamics. He raises the question of confidence in the dollar and U.S. financial markets. If there is a stock market crash, like those in 1987 and 1989, some time before the election, the deficit could indeed become a hot political issue that the Democratic candidate might be able to exploit. This is not an unrealistic possibility, says Bartlett:

  • Inflation and interest rates are going to rise as the economy picks up steam.
  • Sometimes markets ignore such trends for a long time and then suddenly take notice all of the sudden.
  • This could lead to a sharp readjustment in the stock market at some point.

If history is a guide, whatever the true reasons for the market break, policymakers inevitably will focus on the budget deficit as the underlying cause. That is what happened in both 1987 and 1989, says Bartlett.

Source: Bruce Bartlett, "Worrying About Deficits," National Center for Policy Analysis, January 12, 2004.


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