Do budget deficits affect long-term interest rates? U.S. federal budget deficits are back big time. What will be their long-term consequences? Seven big thinkers enter the ring, gloves up

International Economy, The, Summer, 2003

This brings us to history's bottom line, as insisted on by one economic luminary after another, from Adam Smith and Karl Marx to Alfred Marshall and John Maynard Keynes: No country can enjoy sustained living standard growth without investing, and no country can sustain high investment without saving. All of these thinkers agreed that nothing undermines the "wealth of nations" as predictably as a government that cannot live within its means.

To be sure, temporary deficits are sometimes good policy--for example, to finance massive outlays during wartime or to stimulate consumption during a recession. Right now, with real interest rates along with industrial capacity at a cyclical low, such deficits are probably advisable. But that is not what the Administration wants. Instead, with a mere wink at "sunsets," it is pushing through permanent tax cuts that will keep the budget underwater beyond the next business cycle and the next several after that.

Almost no economist believes that the much-touted "incentive" impact of these tax cuts will prevent them from suppressing national savings. Most agree, to the contrary, that they will eventually suppress overall GDP growth and raise taxes even higher for future generations, either to pay off the extra debt or simply to service the extra yearly interest. As Milton Friedman once put it, if you cut long-term taxes without cutting long-term spending, your aren't really reducing the tax burden at all. You're just pushing it off yourself and onto your kids.

Some conservatives say that these tax cuts, by starving the government for funds, are the only way to compel liberals and the general public to go along with spending cuts. But this stratagem is hypocritical, unfair, and cynical. It is hypocritical because on the spending front, they do nothing to reform entitlements, allow debt service costs to rise along with debt, and urge greater spending on defense--when these three functions comprise over four-fifths of all federal outlays. It is unfair because no end, however legitimate, can justify holding the next generation hostage on the dubious bet that another party will have the good will to relent. It is cynical because it assumes that our democratic process is broken and that we can no longer directly advocate a policy for the common good. It is also shortsighted, because it wrongly assumes that liberals can't play the same game and raise the ante--by proposing large new benefit programs (say, national health care) in place of tax cuts.

Our nation faces at least two history-bending challenges: global terrorism and global aging. Meeting the first may require marshalling new resources far above the extra spending already legislated. Meeting the second will test the ability of our society to provide a decent standard of living for the old without imposing a crushing tax burden on the young. It seems obvious to me that America should not approach this fiscal gauntlet encumbered by deficits as far as the eye can see. To do so would be to ignore every principle of public finance, generational equity, and economic stewardship.