September 7, 2004

The Budget Is NOT The Economy

Here's some news from the presidential campaign that indicates that John Kerry has no clue what he is talking about. The story says Kerry pointed to the "record" $422-billion-dollar budget deficit predicted by the Congressional Budget Office as a new sign of Bush's inability to run the economy.

Memo to Sen. Kerry: The federal budget is not the economy. Repeat: "the budget" is not a synonym for "the economy."

The budget is the government's annual spending plan. The economy, on the other hand, is the country's system of production and distribution and consumption. The health of the economy is determined by trillions of little economic decisions made by millions upon millions of people every day. A person buys a candy bar or a car or a house? That's the economy. A person decides to go back to school to prepare for a different career? That's the economy. An entrepreneur decides to start a new business and hire a few people to work for her? That's the economy.

The federal budget is not the economy, it is a tax on the economy. John Kerry knows something about taxes - in the Senate he voted to raise taxes 98 times.

The media is telling America today that the projected $422 billion budget deficit is the largest in history. They are misleading the American public in a number of ways.

First, they fail to mention that the $422 billion projection is actually down $55 billion from January 2004, when the fiscal 2004 deficit was projected at $477 billion. Second, they fail to credit the declining deficit projection to stronger-than-expected economic growth. Third, they fail to credit the stronger economy to President Bush and his tax cuts, light regulatory hand and overall economic policies.

And, fourth, they fail to tell the whole truth about the deficit - that, as a percentage of GDP, a $442 billion deficit will be only the 17th largest of all time.

It goes without saying that a smaller deficit is better than a larger deficit - but only if it is achieved via economic growth rather than tax increases. A tax increases to fill a deficit is a short-sighted economic policy that only causes worse fiscal problems down the road. A tax increase slows the economy, reducing its growth and reducing the future growth of tax revenues, making future deficits worse. Tax cuts, on the other hand, fuel economic growth, reducing future deficits.

It's happening right now, as a matter of fact. Because of the three big tax cuts pushed into law by President Bush, the economy is growing faster - and generating more revenue - than was previously expected.

The projected deficit for fiscal 2004 is just 3.6 percent of gross domestic product - that's down from a projected 4.1 percent just six months ago. The deficit in fiscal 2005 is projected at just 2.8 percent of GDP.

Let's put that in perspective. If you owe $5,000 on your Visa, and make $20,000, you have a sizeable financial problem as a large chunk of your take-home pay must go to pay the minimum payment on your Visa. If, two years later, your credit card debt has reached a new personal high of $10,000, but your income has increased to $80,000, it is both true and false to say your debt has set a new "record" high. In pure dollar terms, yes, but as a percentage of your income your debt has actually declined significantly.

Your income is your ability to finance the debt or pay it off. If you are faced with a debt, you can address it one of two ways. You can "tax" yourself by diverting more of your income to pay the debt, thus reducing your consumer spending or your investing or your saving for the future. Reducing your spending means reducing your current lifestyle, while reducing your investing or saving for the future means reducing your future lifestyle. The other alternative is to focus on increasing your income, enabling you to both pay down your debt faster and build a more prosperous future.

The national GDP, likewise, represents the nation's ability to finance its debt or pay it off. Thus, the proper policy focus is on growing the economy, not on reducing the nation's deficit or debt. President Bush understands this. You and I understand this.

But John Kerry - who doesn't even understand that the federal budget is not a synonym for "the economy" - is going to flit around American prattling on about the "record" budget deficit and how it shows Bush can't manage "the economy." And the media, either out of ignorance or partisan complicity, is going to help Kerry spread the meme.

Arm yourself with the facts. The American economy has never been healthier. James Glassman:

We just set a record for yearly production: a GDP of nearly $12 trillion, or $120,000 per family. As for what really counts, personal well-being: A record 69 percent of Americans own their own homes, and the account balance in the average 401(k) plan is $77,000, up 22 percent in three years. ... Bush can be proud of the U.S. economy and what he's done to keep it growing. He was dealt an extremely miserable hand by his predecessor. As Bill and Hillary Clinton were leaving the White House, the tech-stock bubble was deflating, and GDP and employment growth were slowing sharply. A recession began two months later. The fraud at Enron, WorldCom and other companies, which would bloom into historic scandal in the fall of 2001, also occurred under Clinton's watch. And, then, of course, there was 9/11.

But the U.S. economy will never perform as strongly as it otherwise could as long as the threat of mass-casualty terror attacks remains a real and present danger. That's why the number one economic issue we face today is not taxes or outsourcing or the price of oil, but selecting the right leader and the right strategy to win the global war on terror.

UPDATE: Steve Verdon has more on the media's innacurate reports on the size of the deficit. Verdon:

We have idiots reporting on economic matters. It took me maybe 30 to 45 minutes to find all this data and compose this posts and I'm not a journalist. These guys should be fired.