Taming the deficit

The federal deficit, which measures the difference between how much money the government takes in and how much it spends, hit a record $375 billion in 2003. The White House sees it soaring to $521 billion this year, when it is certain to be an issue in the presidential campaign.

Most economists say deficits aren't necessarily a bad thing. "When the economy is underemployed, government deficit spending helps put people back to work to get businesses profitable and get the economy back where it's supposed to be," said Benjamin Friedman, a professor of economics at Harvard University. At times deficits are unavoidable, notably during war.

The fear in the years ahead is that Washington's enormous funding needs will drive up interest rates, making it harder for businesses to finance their own growth and eventually putting the brakes on economic expansion. Critics of today's tax cuts say President Bush is inviting such a fate.

[The following is about one of the "rogues' gallery" of years when the deficit spiked, especially relative to the size of the economy, 2004, and what created the problem, how Bush reacted.]

2004: "Guns and Tax Cuts" - After a 27-year absence, federal surpluses returned during the Clinton presidency, but the red-hot economy cooled just as President Bush was taking the reins and now deficits are back with a vengeance and will likely stick around.

The Sept. 11 terrorist attacks, the wars on terror and in Iraq, and three tax cuts haven't helped. The Bush administration argues that the tax cuts are necessary to stimulate growth and says deficits will fall by half in the next five years as the economy recovers. White House economists also claim that current deficits aren't that alarming when measured against GDP.

Others are less sanguine. Goldman Sachs' Mr. McKelvey said the deficit this year is at about 4.2% of GDP: "It's not a record. It's not outrageous. But the problem is that it's very hard to see how we're going to get that percentage down." Economists say it will be near impossible to wring savings from the Pentagon or curb so-called mandatory spending on programs like Medicare and interest paid on the national debt. That leaves hacking away at the other 20% of the budget or reversing the Bush tax cuts -- both huge political challenges.

And as to growing out of the deficits? "This is an economy," said Harvard's Mr. Friedman, "that is getting itself back to full employment. And yet the deficit is getting bigger not smaller. We're moving in the wrong direction."

The wsj.