Donald J. Devine

November 30, 2004

Second Term Deficit Hawk

Something very important happened to President Bush at the recent Asia-Pacific Economic Cooperation summit in Chile, an experience that just might turn him into a consistent deficit hawk.

The critical meetings with Pacific Rim nations were with Japanese Prime Minister Junichiro Koizummi and China President Hu Jintao. The president, like his father, listens to and respects national leaders who meet the same challenges as he, even if to a lesser degree, especially if he views them as allies. The president pressured Hu to moderate China's exchange link to the dollar but it was Hu who responded that the U.S. needed to do more to sustain its own dollar. More important, Koizummi bluntly told Bush he must deal with the American twin deficits in government spending and trade to stabilize the currency, echoing the concerns raised by Federal Reserve Chairman Alan Greenspan the same week.

President Bush responded immediately and publicly, acknowledging his "concern about whether or not our government is dedicated to dealing with our deficits." The fact that Japan and China are the two largest holders of U.S. debt and funds made an appropriate response essential. If they lost confidence and redeemed these obligations, it would cause economic catastrophe. So the president promised: "the best way to affect those who watch the dollar's value is to make a commitment to deal with our short-term and long-term deficits." And he headed home, unlikely, in our opinion, to change his mind and disappoint his foreign friends and allies.

At the same time, Congress was finishing work on the Omnibus Spending Bill. Lo and behold, on November 20 Congress passed the smallest increase in domestic federal spending since 1995 following the Republican take-over of both houses of Congress. In the final weeks of the campaign the president began speaking about restraining government growth and pointing to the pending bill as only increasing non-defense discretionary spending by one percent, verses his previous eight percent per year average increase. Cynics, including yours truly, fully expected spending projects to be added back during the post election lame duck session. Given a few tricks on “emergency” spending and the possibility of later supplemental bills, by and large, they were not.
What happened? How did the spending bill remain so frugal? To some extent, Congressional Republicans had buyer's remorse after increasing spending by 39 percent over four years. To some extent, they realized that the spending--except for local pork, which frankly is not all that expensive even if it makes an easy media target--did not help them politically. Both the drug and education spending splurges were outbid by Democrats demanding more, denying any additional support from these senior and education constituencies for all of the money expended. So why not vote one's heart--and there would be plenty of time for spending later if things look too dangerous for 2006? But they just might be surprised this time that the White House--which did hold their feet to the fire on the one-percent solution--might not just continue on the road to austerity.

Reigning in non-defense discretionary spending is an essential first step. Yet, that represents only 14 percent of federal spending. Entitlements must be restrained if confidence is to be restored in the dollar and Medicare and Social Security are to avert bankruptcy. The president has already proposed private accounts for Social Security but most speculate he will devote only two or four percent of the payroll tax to the matter. The Democrats are already proposing that any private accounts be added on top of the present tax, which will do nothing to deal with the red ink. The problem is that even if the president were to be fully successful with his proposal, it is not large enough to avert the crisis--and Medicare is the larger problem anyway.

The president might as well be bold, for his opponents will attack whatever he proposes as hurting the old and poor. He might as well be hung as a sheep as a goat and try to solve the problems of both Medicare and Social Security. In any event, he has promised his foreign friends to begin dealing seriously with spending and that is a great start. Mr. Koizummi may not have repaid for our post war aid but if he has helped avert the coming economic crisis, it will have gone a long way toward settling the score.