By Jonathan Weisman Washington Post Staff Writer Sunday, August 24, 2003; Page A07
Wall Street economists -- many of them allied with President Bush's tax-cutting agenda -- are increasingly calling for stronger signals from the White House that the rising federal budget deficit will be addressed seriously. Tax cuts totaling $1.7 trillion over the last three years have helped put the economy on the path to a strong recovery, they say. Now the deficit needs the White House's attention.
"It's already time to think beyond this year and next about how to take down long-term deficits that could become disastrous," said Allen Sinai, president of Decision Economics Inc., who has strongly supported the president's tax cuts. "It would be good for the economy for the administration to at least signal they will do something."
The Congressional Budget Office will release new budget forecasts Tuesday that will put next year's red ink near $500 billion. Sinai's own forecast put the figure even higher, as high as $535 billion. Absent any serious change in policy, private sector economists say deficits will remain in that range through the decade, then escalate sharply with the retirement of the baby-boom generation.
"I see absolutely nothing that's going to bring the deficit back to balance in the foreseeable future," said David Wyss, chief economist at Standard & Poor's.
Bush's response Friday was that Wall Street and others should put such concerns on hold until after the economic recovery begins to produce jobs.
"Those who are worried about the deficit must first worry, I hope would worry first, about people being able to find work, like in Washington state," Bush said to reporters near Seattle. "I am more concerned about somebody finding a job than I am about numbers on paper."
That said, he did add, "we've got a plan to reduce the deficit in half in five years," alluding to administration budget projections that the deficit will shrink by half without any policy changes.
Congress has passed tax cuts in each of the last three years, but has not approved all the tax cutting measured proposed by the president. White House budget director Joshua B. Bolten, in a meeting Friday with Washington Post editors and reporters, said the administration will continue to push those proposals for another $796 billion in tax cuts over the next decade. He declined to detail a long-term deficit reduction plan, and offered no new policies beyond Bush's call for fiscal restraint and tax cuts to spur economic growth.
The president's budget for 2005 will allow spending at Congress's discretion to grow by 4 percent, Bolten said.
He strongly defended the tax cuts that remain on the president's agenda as "the right policies." They include extending existing tax cuts that are scheduled to expire while offering new tax credits for health insurance and charitable giving, housing development, energy exploration, business research and development, and new savings accounts that would render income from investments tax-free for virtually all Americans. Those tax cuts will help put the economy on a stronger footing, which will help bring down the deficit, he said.
"I don't see the president's tax cutting agenda as entirely dissociated or even in conflict with bringing the budget situation well under control," Bolten said. "The most important priority for the deficit picture is bringing the economy back to growth."
Already in record territory, the deficit will likely flare up as an issue again next week with CBO's budget update. The analysis promises to be particularly pointed in its assessment of the choices facing lawmakers. It will present three different scenarios: One that assumes emergency wartime spending this year would continue indefinitely and three consecutive tax cuts would be allowed to expire over the coming decade, one that assumes military expenditures in Iraq and Afghanistan would not be repeated and the tax cuts would expire, and one that assumes the tax cuts would be made permanent and war spending would continue.
Those differing breakdowns should underscore the impact of Bush's tax cuts and foreign policy on the long-term budget picture. If the tax cuts expire and military spending in Iraq and Afghanistan winds down, the budget would be back in balance -- or at least close to it -- by the end of the decade, budget forecasters predict.
But with military spending locked in, tax cuts likely to be extended, Medicare and prescription drug spending sure to rise, and political interest waning on a fix for Social Security, "the government is in a pickle," said Mickey Levy, chief economist at Bank of America.
Many economists still believe the deficits pose little threat in the short run. Left unchecked, however, they could raise long-term interest rates, dampen private investment and distort private-sector growth by pushing the economy toward government purchasing, especially military procurement, many say.
Diane Swonk, chief economist at Bank One Corp., even raised a fear that has seemed remote for half a decade: inflation.
Coupled with surging defense spending, "a trillion in deficits over two years could create explosive [economic] growth," she said, predicting an unacceptable inflation rate of 3 percent emerging by the end of 2005 .
"We're pouring jet fuel on the economy," she said. "We've got overzealous policymakers willing to keep the pedal to the metal well beyond when it was necessary."
Economists eyeing the budget deficit are looking for answers from the administration, Sinai said.
"Step one is reassurance that what the administration did [to stimulate the economy] is tactical only, and that in longer run, they understand budget deficits cannot be allowed to remain at these levels."
Bolten repeatedly emphasized his concern about the deficit. "The deficits we are currently running and projecting -- at least out over the visible, relatively short window -- are manageable if we continue pro-growth economic policies and if we exercise responsible fiscal restraint," he said. "When I've said manageable, I have not intended that to be taken as cavalier. In some cases, to the extent I've seen my name in print, it's been for the cavalier notion that it's manageable; we don't care. That's wrong."
But, he said, "I don't know what we need to do with respect to Wall Street. That's for them to judge. It's actually pretty hard for anyone to figure out what the right signals are."