Deficits that  Menace (Democratic) and  Deficits That Are Tolerable (Republican)

by Edward S. Herman
January 16, 2004

One of the most telling illustrations of the power of the corporate community over politics and the media is the different treatment of  deficits produced by Democrats and Republicans. The corporate community distrusts Democrats, because, while they are increasingly on the corporate take and strive mightily to convince business of  their reliability on matters important to business, they do have a large non-corporate constituency and have sometimes in the past, even recently, done things that serve their social, as opposed to financial, support base. The Democrats are therefore tagged with the "tax and spend" label,  and are under steady pressure to curb spending for that mass constituency. Deficits produced by this untrustworthy Party are therefore considered menacing, threatening runaway budgets and inflation.

On the other hand, Republicans are the pristine party of business,  trusted by the corporate community to serve its interests. If this Party in office produces fiscal deficits, these are likely to result from regressive tax cuts or from enlarged spending that will serve the corporate interest, as in the case of  military expenditures that yield high returns to Lockheed and company and imperialist wars that will open doors to markets, capture resources for privileged exploitation, and distract attention from domestic policies damaging to the majority. Republican deficits are therefore tolerable and do not threaten runaway budgets and inflation. There is no audible mainstream labeling of Republicans as the "fat-cat tax cut, spend, and deficit ballooning" Party.

Thus, back in 1988, the CEO of Citicorp, Walter Wriston, pooh-poohed the huge deficits of the Reagan years, which tripled the federal debt during Reagan's term of office. Wriston stated that we must distinguish between capital and operating budgets, and that the normal household does not treat its home as a current expense, so that we need not worry as  there is "near balance in the operating budget." But back in 1978, with Democrat Jimmy Carter in office, Wriston said that federal deficits were "diverting available capital from productive private investments to finance public expenditures. Only a reduction in the federal deficit would reverse this trend." No mention of  any difference between capital and operating budgets when dealing with a Democrat! The irony is that in this case not only were the Carter budget deficits relatively small, the Reagan deficits were also created to fund tax cuts and military expenditures, at the expense of both public and private capital growth, both of which slowed up in the Reagan years.

So "tax and spend" Democrats--Carter and Clinton--were under continuous pressure to contain spending and avoid or reduce budget deficits, to prove to the business and financial communities that they were not going to go the populist route and spend on behalf of the general citizenry, as opposed to spending on gigantic and dangerous boondoggles like Star Wars and other military and imperial projects. As Paul Krugman has noted, "when conservatives denounce 'runaway government spending' in California, what they're really talking about is the effort to hire more teachers and repair decrepit school buildings." The tax and spend Democrats had to worry about the new power of the financial community to flee the dollar, with adverse effects on interest rates and inflation. Reagan, Bush-1 and Bush-2 had few worries on this score as they were trusted, and in consequence could produce huge deficits  to fund unproductive (and destructive) outlays-and tax cuts for their financial supporters-without much attack or worry.

It is droll to see how the "conservatives," Reagan and Bush-2, have been able to spend like crazy on military projects and create immense deficits, and Clinton cut back on spending and actually run a budget surplus for three years, without making a dent in the mainstream perspective of Democrats as spendthrift and fiscally irresponsible and the Republicans fiscal conservatives. It parallels Bush-2's being accepted as a superior protector of  U.S. national security, despite his primary responsibility for the 9/11 security failure and for making us less secure by the day. These Orwellian perspectives rest on Bush-2's (and before him, Reagan's) service to the important people and interests.

Clinton focused on balancing the budget even before he hit office, abandoning his "putting people first" agenda in the face of a perceived threat from bond traders to punish him for any populist moves. He did this at a time when the country was barely coming out of a recession, contrary to fiscal policy rationality, which calls for more government spending, tax cuts, and deficit enlargement in such circumstances. He was lucky that other factors came to his rescue allowing the recession to close and an expansion to take place, including wage stability based on a weakened labor movement (which he failed to strengthen), and relatively easy money from Greenspan, perhaps influenced by the stock market bubble so helpful to his friends. But "people" were left out, with Clinton cutting the federal budget for education and poverty alleviation and foregoing needed environmental and infrastructure outlays in favor of  budget balancing. He and his fellow New Democrats became so enamored of  budget balancing and debt reduction that Clinton and Gore both vowed to reduce the federal debt to zero, an anti-people target, entailing stupid macro-policy, but proof to the financial community that the New Democrats were not populists.

It might seem that Bush-2 was following traditional Keynesian macro-policy rules with his initial  massive tax cuts carried out in the midst of a recession, but this is not so. The great bulk of his tax cuts became operative with a lag that made them unhelpful in combating the ongoing recession, and were clearly designed  to help the mainly affluent tax cut beneficiaries and contribute to the new rightwing and reactionary aim of scaling back government (in its civil functions only, not the military and police functions). Both Reagan and Bush-2 created massive structural deficits, meaning deficits that would persist even at full-employment-and that the federal debt would continue to grow.  The obvious remedy would be tax increases, cancelling out the irresponsible and reactionary tax cuts already passed (and Bush-2 has given us three rounds). But the people who count, the business and financial community, who benefited from the tax cuts, many of whom are pleased to see the civil society budget cut further, oppose raising taxes, so for the corporate media and New Democrats this is ruled out. What is left is further cuts in spending for the civil society, starting with its weakest elements (black welfare mothers) and moving along from there.

So the "conservative" Bush transformed a $230 billion surplus inherited from "tax and spend" Bill Clinton into a $450 billion dollar deficit , and he has built-in to the fiscal system a  structural deficit of large proportions, with a long-term budget gap of  some 25 percent of federal spending. The Congressional Budget Office estimated recently that a continuation of Bush's policies will triple the national debt by the end of fiscal 2013, with a ten trillion dollar increment, matching the performance of  "conservative" Ronald Reagan. A large fraction of  this increment will result from tax reductions, heavily biased toward the upper income brackets and corporations, and of course a large chunk of the deficit-creating expenditures for instruments of death, so favored by the pro-life administration.

The fiscal disaster Bush  has engineered is so massive and threatening that quite a few conservative-as opposed to reactionary and quick-buck-Republicans have  cried out in anguish (Cato. The Concord Coalition), and so have important members of  the mainstream media, some of  whom have been more vocal on this issue than the Democrats, whose cowardice seems limitless. But given the magnitude of the threat posed, the outcries have been modest-far too modest to affect policy.

When the crunch comes, there will be a "conservative" push to attack Social Security and Medicare, as well as Medicaid and any remaining measures helping poor people. This will entail more serious political problems, as the middle class, already hurting from downsizing, cutbacks and threats to employer-based medical and pension support, and  growing outsourcing of  white collar jobs, may become politically aroused and alert. Social instability is also a likely outcome of  Bush's and corporate policies.  There is also the definite possibility that the global money market may lose their faith in U.S. solvency and flee the dollar,  with serious consequences on interest rates and macro-economic stability. Despite the "market's" approval of  Bush's many valiant efforts on their behalf in the short-run, the long-run effects of  his aggressive imperial strategies and lunatic domestic tax, spend-on-waste-while-cutting-back-on-human-services, and deficit-creation policies may eventually strike them as unsustainable. At that point there may be a choice made between a full-fledged police state to maintain "stability" or an ouster of the ruling lunatic fringe.     

First published in Z Magazine

Edward S. Herman is Professor Emeritus at the Wharton School, University of Pennsylvania.

Back to Political Articles