Perhaps the least-surprising news of the night: As soon as it became clear that Republicans would regain the Senate, Iowa Republican Sen. Charles Grassley told CNBC that making last year's tax cuts permanent would be a key item on the GOP agenda.
The prospects have similarly improved for several other Republican economic projects that have been bottled up by Senate Democrats, including tax breaks for investors who have taken losses and tax cuts for profitable corporations.
Such moves may or may not help jump-start the sputtering economy. But they will virtually guarantee a return to the era of structural budget deficits. That may be the most far-reaching economic implication of yesterday's unexpected Republican sweep. We are now blessed with a Congress and executive branch devoted to the proposition that the government should spend, but not tax. (And what's more, it shouldn't try too hard to collect the taxes that are owed, especially if they're owed by companies or the cheating wealthy.)
Last month, the books were closed on a disastrous fiscal 2002. The government ran its first deficit since 1997—$157 billion—and the $6.3 trillion, 10-year surplus that President Bush inherited all but evaporated.
Of course, many of the spending increases and the tax cuts were telegraphed in the 2000 campaign. Bush entered office committed to spending more on defense and education, and to not slashing popular entitlement programs. Wouldn't be compassionate. And to be sure, Democrats abetted the squandering of the surplus. But every time a problem has cropped up—a drought on the plains, problems in the farm economy—the Bush administration and Congress got together to increase spending. Add the costs of permanent mobilization for the global war on terrorism, and you get an expanding deficit. Last year, spending rose 8 percent while receipts fell 7 percent.
It's true that as a percentage of GDP, the deficit is comparatively small. A $157 billion deficit in a $10 trillion economy is peanuts. Back in the early '90s, deficits approached $300 billion in a $7 trillion economy—triple the impact of today's shortfall. And I don't subscribe to the '90s-vintage Republican orthodoxy that the government should balance its books every year. When the economy can't generate jobs on its own, the government should run a deficit. So far the re-emergence of the budget deficit hasn't hampered the economy much. Despite the deterioration in the federal balance sheet, interest rates have plummeted to record lows—the opposite of what many thought would be happen.
So, what's the problem?
Well, the election changes the dynamic of revenues and spending in troubling ways. Essentially, all the forces against deficit spending have either disappeared or been defanged. Alan Greenspan was a deficit hawk in the '90s, but he has either forgotten the significance of long-term deficits or changed his tune because a Republican is in the White House.
The Democrats who controlled the Senate for most of the past two years embraced balanced budget politics—although they did it more from political expedience than principle. But those Democrats no longer run the Senate. Gone, too, are many of the Northeastern root-canal Republicans—like Warren Rudman—who could be relied upon to agitate for balanced budgets. With control of both houses of Congress and a 2004 re-election campaign that starts now, Republicans will have little incentive to control spending.
What's more, the government spends money in far bigger chunks now than it used to. The United States nearly broke even on the Gulf War. By contrast, we'll be picking up the tab for any military campaign against Iraq: $50 billion to $100 billion. The numbers bandied about for a prescription drug benefit are in the hundreds of billions. Among other worthy issues with bipartisan support, we'd need several hundred billion to fix the alternative minimum tax and a couple of trillion to "save" Social Security.
Even without such gigantic commitments, it's likely that the disconnect between government income and spending will grow. More and more, the federal government is coming to resemble one of those little oil companies the president was involved with in the private sector. Every year, revenues go down and expenses go up. Under Bush, government spending has risen at a 6.05 percent annual compound rate, while receipts have fallen at a 4.34 percent annual rate. If the trends of the past two years continue, the government would run a $590 billion deficit in 2004. On a percentage basis, we'd be back where we were at the end of Bush père's term. Disregard the administration's absurdly optimistic prediction that revenues will rise 9.5 percent and spending will rise just 6.3 percent in 2003. The continued phase-in of the backloaded tax cuts and the likely passage of new tax cuts mean revenues are likely to fall further.
Meanwhile, it's difficult to read the shift in congressional control as anything but a green light for tax avoidance. Buried amid the campaign talk yesterday was a New York Times article in which outgoing Internal Revenue Service Commissioner Charles Rossotti lamented that his agency is unequipped to deal with the growing army of wealthy and sophisticated tax cheats. "Basically, demands and resources are going in the opposite direction," said Rossotti. "This is systematically undermining one of the most important foundations of the American economy." What's more, the Bush administration had prohibited Rossotti from telling a congressional hearing that the IRS couldn't do its job with the funds it had.
All those who think that Bush will replace Rossotti with a pit bull and then grant him the resources he needs to pursue tax cheaters aggressively, raise your hands. (The deficit the administration helped create is the perfect excuse not to bolster watchdog agencies like the IRS and the SEC.)
With the corporate scandals having proved irrelevant at the polls, the Republican-controlled Senate now has little incentive to crack down on companies or individuals going offshore to avoid taxes, or on accounting firms constructing sketchy tax shelters. Already, corporations have been paying a declining share of taxes—a mere $144 billion last year. While the profits they report to investors have risen steadily, the income taxes paid by corporations have fallen. In 2002, the corporate income tax raised 22 percent less than it did in 1997.
Granted, budget figures are notoriously hard to predict. But given the trends and the new power arrangements in Washington, it's difficult to see how the budget will be balanced anytime soon.