Deficit blues.

Nearly two hundred and fifty years ago, Benjamin Franklin observed that it is "better to go to bed supperless than wake up in debt." During the past four and a half years of the Bush administration, the American people have bought supper on credit and supersized the debt left to their children.

On May 11, with scarcely a peep from Congress, President George W. Bush signed an $82 billion supplemental appropriation for the war in Iraq, bringing the total approved for that ill-conceived and open-ended adventure to nearly $200 billion. Whatever the moral, political, or military wisdom of the war, none of the bill has been paid. It has simply been added to the deficit. In effect, our young soldiers fighting in Iraq will be paying for the war long after they return home--and long after the president has left office.

Still, the war is a relatively minor aspect of the president's overall fiscal policy. During last year's presidential campaign, Bush pledged to reduce budget deficits by half over the next four years. His recently approved budget claims to do that, but reading the fine print, David Broder of the Washington Post discovered it will add $683 billion to the national debt next year, and $600 billion-plus each year for the following four years. According to former Treasury secretary Robert E. Rubin, most independent analysts now project a ten-year federal deficit of nearly $5 trillion.

Unfortunately, piling up debt is not a problem confined to government. The personal indebtedness of Americans has never been greater. The Wall Street Journal recently reported that since 1990 the median U.S. household income (adjusted for inflation) has risen 11 percent. Over the same period, however, household spending has risen 30 percent. How have families managed to pull it off? In one word, as a character in The Graduate once put it in a different context: plastic! During the same period, median household debt catapulted 80 percent.

In a dubious effort to curb this trend, the nation's lawmakers recently made it harder for individuals to declare personal bankruptcy (see Mark Sargent, "Bad Credit," May 20). Yet at the same time, they raised the ceiling on the federal debt, lowered taxes, agreed to more spending, and bridged the difference by borrowing from abroad.

Who has been the biggest enabler of this short-sighted profligacy? China. Not only was last year's trade deficit with mainland China $124 billion, but China bought more than $250 billion in dollar-denominated securities. It now holds more than $600 billion and has become America's largest foreign creditor. China's willingness to buy dollars has kept the value of its currency, the yuan, low, making its exports cheap while helping to keep U.S. interest rates down. Those low rates have spurred a housing boom that has lifted the U.S. economy in general and allowed many people to borrow on their equity with abandon. If--and, more ominously, when--China decides to stop buying dollars, the U.S. Treasury will be forced to raise its rates. At that point, the interest on the deficit will begin to crowd out private investment, and an economic slowdown will ensue. Earlier this spring, loose talk among some Asian lenders about buying currencies other than the U.S. dollar roiled financial markets.

The best course for avoiding such adverse developments is both tried and true. It was applied--and proved highly successful--not that long ago. In 1993, tax increases, combined with spending cuts, reduced the budget deficit and led to the longest economic expansion in U.S. history. If Congress were to repeal just the Bush tax cuts for those earning above $200,000, and maintain the inheritance tax the administration is seeking to abolish, the ten-year deficit would be reduced by 25 percent. Furthermore, according to Secretary Rubin, repealing the 2001 and 2003 tax cuts would bring in an estimated $11 trillion over seventy-five years, providing almost three times the entire Social Security funding shortfall the president claims to be losing sleep over.

Some governors, faced with growing deficits and mandated by law to balance their budgets, have taken action. In Colorado, antitax Republican governor Bill Owens, faced with more expensive federal mandates but pinched by reduced federal funding, has agreed to a referendum that would allow an increase in state spending over the next five years by requisitioning money previously slated to be returned to taxpayers. His bottom line: "This will put Colorado back on track."

Taxes now take about 16.5 percent of Gross Domestic Product, which represents the lowest level of taxation since 1960. According to Business Week, our present deficits are caused as much by the lack of tax revenue as by excessive government spending. That being the case, the prudent course is to repeal the Bush tax cuts. The longer the delay, the higher the costs--for everyone.

May 24, 2005