Bush argues history suggests US can grow its way out of deficit

President Bush and his advisers say they can turn red ink into black within the decade by delivering an average of 4 percent annual economic growth. History is on their side.

When Vice President Dick Cheney told former treasury secretary Paul O'Neill that "Reagan proved deficits don't matter," according to a recent book based largely on O'Neill's recollections, he was referring to deficits that burgeoned in the early 1980s under the former president. Eventually the deficits exceeded 6 percent of gross domestic product. That was a post-World War II record. But under deficit-reduction plans and the heady growth of the 1990s, those deficits disappeared.

The nation's ledger has swung from a surplus in the waning years of the Clinton administration to a $401 billion deficit in 2003, according to estimates compiled by the Congressional Budget Office.

That figure is expected to rise to $491 billion next year and escalate steadily over the next decade -- at an average of 3 percent of GDP -- to $687 billion. The national debt, currently an estimated $4 trillion, is projected to grow by another $5.3 trillion in the next decade, absent serious cost-cutting and revenue increases, according to the Congressional Budget Office and private-sector economists.

As President Bush made clear in his State of the Union address, the White House has no intention of reversing the massive tax cuts that have played a large role in shifting budget surpluses into deficits. Instead, he will push for permanent tax cuts and spending increases to underwrite an ambitious policy agenda that includes prescription drug benefits, an energy program, space exploration, and the spiraling costs of rebuilding postwar Iraq. Administration supporters say these expenditures, while vast, are affordable for the world's largest and most dynamic economy. They cite the country's enormous third-quarter economic growth, of 8.2 percent, and forecasts among private-sector and government economists of 4 percent annualized growth this year, as proof that Bush's tax cuts can grow the economy beyond any debt-related risk.

In textbook economics, chronic borrowing inevitably fuels rising interest rates, which can reduce economic growth. But, so far, rates remain near historic lows.

"Nothing -- the tax cuts, rising deficits -- that has happened in the last two years has harmed the economy," says Kevin A. Hassett, an economist at the American Enterprise Institute, a Washington think tank that mirrors administration thinking. "Our economy is far less exposed to high debt levels than other countries." For instance, the average national debt level among industrialized countries, at 50 percent, is far higher than America's 35 percent. Japan labors under a debt load equal to 120% of its economy, about the same ratio the US carried in the first few years after World War II.

"It's easy to find periods when debt was heavier to bear than today," says Paul Evans, a professor of economics at Ohio State University.

"Following the Napoleonic wars, British debt was 2 1/2 times the size of its economy, and yet Britain retired that debt and the sun continued to rise over its empire for decades afterward."

Stephen J. Glain can be reached at glain@globe.com.