Budget deficits reduce the country’s national saving, which reduces the assets owned by Americans and so reduces our future national income. The same thing is true for the country as a whole. ![]() The borrowing effectively places a mortgage on the family’s future income and thereby reduces its future living standards. But even without a higher rate, the family has a debt to repay. It may run up its credit card balances so much that lenders charge higher interest rates on additional borrowing. To see why, think of a family that borrows lots of money to take a vacation. Another implication is that the 2001 tax cut raised interest rates enough to reduce investment and hurt long-term growth.īut even if deficits don’t affect interest rates at all, there is a real cost to long-term deficits. One implication is that the Bush tax cuts will eventually raise rates by more than half a percentage point-increasing payments by about $700 a year on a $150,000 mortgage. Indeed, the council recently reported that a sustained deficit of 1 percent of gross domestic product would raise rates by a third of a percentage point. Those who share this belief include Federal Reserve Board Chairman Alan Greenspan and Harvard professor Greg Mankiw, whom Bush nominated to be head of the Council of Economic Advisors. Along with many other economists, we believe that there is compelling evidence that projected future budget deficits raise interest rates. The second mantra-that deficits don’t really matter-goes against economic theory, evidence and common sense. And over the next 10 years, the administration’s tax cuts are a larger and larger part of the deficit problem. Even so, the tax cuts enacted and proposed for 20 would be more than three times the cost of the war, according to a study by the Center on Budget and Policy Priorities. Much of the decline in this year’s deficit is due to a slowing economy and the aftermath of Sept. The first mantra contains a shred of truth. These claims have become increasingly outlandish as time marches on. Having pushed big tax cuts in 20, and another one now in 2003, the Bush administration has adopted a series of mantras in response to the fiscal debacle: It’s not our fault even if it is our fault, it is not a big problem and even if it is a big problem, the solution is more tax cuts. ![]() Now, it projects hundreds of billions of dollars in deficits over the same period. Bush took office, the Congressional Budget Office projected budget surpluses of $5.6 trillion from 2002 to 2011. In January 2001, when President George W. Over the past two years, our country has experienced a dramatic deterioration in the federal budget outlook.
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