"By this I mean that we are running up enormous and potentially dangerous budget deficits, tear after year after year. In the short-term, we can survive that and use it to attain short-term goals (eg, fund the war on terror), but sooner rather than later we must exercise fiscal restraint."
Although I agree that fiscal restraint is in order, the budget deficit dangers are being overblown. Here's a good explanation from Thomas Sowell
http://www.townhall.com/columnists/thomassowell/ts20041125.shtml
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Agreed. Good article, good summary.
His very good point is that (to use round and highly estimated but reasonable figures) in a $10 trillion economy, if we grow the economy 4%, that's $400 billion dollars. At a 20% tax rate, that's $80 billion in tax revenue. To Sowell's very good point, if we hold the line on spending, we can grow ourselves out of the deficit in a very few years.
That was the Reagan-Laffer logic of the 80's - but we did not exercise the political will to curb spending. Back then, the Democrats controlled the House, and later, the Senate. The Republicans don't have that excuse now, and they need to deliver.
But I don't agree with his characterization of the problem. It is more serious than Dr. Sowell's characterization. We are running a pair of large deficits -- and neither would be a big problem if they were just temporary blips.
But the problem is that they are the continuation of 40 years of red ink, that turned us from the world's greatest creditor nation to the world's biggest debtor, paying increasing portions of our annual income for interest payments.
Even that would not be so bad if we were using the debt to buy productive assets. That could even be beneficial; if the production from the assets is enough to cover the interest and the asset is at least holding its value, then I have no problem with us buying it. But we haven't done that: we have created instead entitlements that will be increasingly burdensome as the baby boomers retire.
Even worse, we are out borrowing the money from foreign countries. That's really the way to get yourself into trouble. If our economy was big enough to absorb paying all of the interest and creating the new debt, then while it goes against my conservative instincts, the debt would be acceptable. But we are out borrowing from the lenders of last resort, the central banks of foreign nations. The reason that they are lending is not to give a helping hand, but in their own self-interest, to keep the dollar strong so that their export programs stay strong.
We could at least cut our interest expenses by disintermediating the foreign central banks by borrowing in the local currencies where possible. We could be getting yen a lot cheaper directly from the Japanese public.
But far better would be to take a whacking big axe to the budget. We have the congress with good majorities and we have the presidency -- let's do ourselves and our posterity a big favor and trim the fat from government.