But the war in Iraq confounds this durable relationship. President Bush last week requested $75 billion for the war. Assuming it’s entirely paid by borrowing, the increase would add a mere 2 percent to the $3.5 trillion publicly held federal debt. Ours is a welfare state, not a warfare state. Domestic programs drive government spending–and debt. In 2002 military spending was 17 percent of federal spending; in 1955 it was 62 percent. Of course, war costs could rise. They could range from $100 billion to $700 billion, estimate economists at Deutsche Bank. The higher figure assumes a 12-month war, five years of occupation with nearly 100,000 troops and massive reconstruction ($498 billion). Even the highest cost would only modestly raise federal spending, which–under present policies–is projected at $2.1 trillion this year and $27 trillion over a decade.
When people ask, “Can we afford this war?” what they really mean is “Can we afford this war without giving up anything else?” This is a harder question, because government was overcommitted before the war. That is: it cannot pay all promised future benefits (mainly Social Security and Medicare to retiring baby boomers) without either raising taxes sharply or cutting other programs. Alone, the war’s costs are manageable. Atop everything else, they make a bad situation worse. The bipartisan impulse is to ignore this and to proceed with new budget commitments as if the war weren’t happening.
Bush proposed an expensive new Medicare drug benefit and elimination of the tax on corporate dividends. Democrats, predictably, have denounced the tax cuts as too generous to the wealthy and have called the spending plans, including the drug benefit, too stingy. There are loud cries of “fiscal irresponsibility.” But between the Democrats and the Republicans, the irresponsibility gap is more rhetorical than real.
Democrats resent Bush’s tax cuts because they’d prefer to spend the money. During Senate debate last week the Democrats’ alternative budget would have raised spending by $911 billion over the “baseline” (current policy) in the next 11 years, including the Medicare drug benefit. Their budget projected a balance by 2011, essentially by eliminating Bush’s tax cuts. The Republican-controlled Senate Budget Committee proposed a budget that kept the tax cuts and purported to balance in 2013. The budget that passed the full Senate projects balance by 2012 by stripping away Bush’s dividend-tax cut, worth about $376 billion over the decade. The House passed a budget with all the tax cuts and slightly less spending; it also promises balance by 2012.
Small differences–and the projections aren’t especially believable. They’re too distant. Too much can change. Economists at Goldman Sachs assume slightly slower economic growth and believe Congress will change the “alternative minimum tax,” which–if left as is–would automatically raise taxes. Under these assumptions, budget deficits continue indefinitely. By 2013 the deficit is about 3 percent of gross domestic product (national income). This would aggravate the costs of paying for retiring baby boomers.
Warfare budgets and welfare budgets differ fundamentally. When defense dominated government finance, there was a familiar pattern. Debt rose during war and receded during peace. People couldn’t pay the war’s full costs through crushing taxes all at once. Debt allowed the tax burden to be spread over many years. The power of the U.S. economy has retired this cycle. Even a sizable war can be waged without much disrupting government finances. The irony is that this strength may be a curse in disguise. Politicians face no immediate crisis. They can indulge their instinct for political survival.
Welfare budgets are an exercise in crowd pleasing. Short-term deficits may reflect a weak economy, but persistent deficits reflect a passion for procrastination. Don’t make hard decisions. Placate core constituencies. Don’t offend baby boomers by tampering with their retirement benefits. When the House and the Senate soon reconcile their respective budgets in a conference committee, the odds favor the political path of least resistance: spend a little more than the House would; tax a little less than the Senate. Kick the can down the road.
