About Those Numbers...

The WSJ lead editorial is important today. It is not on the free site, so I am going to steal it from Dow Jones (you are insane if you do not subscribe, by the way). As they say it represents facts you won't read elsewhere.

The Spending Boom
If you want to know how Washington is different from the rest of America, or even from normal human aspiration, consider its reaction to yesterday's major economic news.
Out in the productive part of the country, the big story was the buoyant capital goods report for July. The 1% rise in durable goods orders, following 2.6% growth in June, suggests that the long-awaited rebound in business spending may finally be here. This is -- dare we whisper it -- good news.
But inside the land of spin and spenders, the big story was the increase, to $480 billion, in the Congressional Budget Office (CBO) estimate of the 2004 federal budget deficit. "We've got a grave problem on our hands," intoned South Carolina's John Spratt, the ranking Democrat on the House Budget Committee. The Democratic Presidential candidates joined this chorus of economic gloom, while ignoring the good business spending news.

That's politics, we know. But allow us to draw a couple of points from the CBO update that you won't be reading elsewhere. One is that "the economy now seems poised for a more sustained recovery," with CBO estimating growth of nearly 4% in 2004. Because of that growth, moreover, "the recent surge in federal budget deficits will peak in 2004." That's right, if growth continues even at the CBO estimate of 3.3% a year from 2005-2008, federal revenues will begin to rise again and deficits will fall through the rest of the decade, just as they always do amid prosperity.

What this tells us is that President Bush's decision to use fiscal policy (tax cuts) to promote growth has been the right priority. And it seems to be paying off now in accelerating business purchases. This is crucial to restoring vibrant growth because the economy has had to survive on the hardy consumer since the stock and tech bubbles burst in 2000. This was also one of the explicit goals of Mr. Bush's dividend and marginal income-tax rate cut proposals.

Yesterday's report showed that shipments of non-defense capital goods, excluding aircraft, rose 2.9% in July following a similar rise in June, and are up by more than 21% at an annual rate in the last three months. This figure is especially meaningful because it is a proxy for non-government business fixed investment. Economist Brian Wesbury, among others, thinks this signals third-quarter growth in the 5% range.

By the way, if our politicians are shedding more than crocodile tears about "the deficit," we have a suggestion. They could always slow the growth of their own spending. CBO points out that in fiscal 2003 non-defense discretionary spending will rise a remarkable 8.5%, or $33 billion, mostly for education, health care and transportation. As a share of GDP, this spending will increase to 3.9%, "its highest level since 1985." Anyone who argues that the war on terror is crowding out domestic spending should be laughed out of the room.

The CBO report makes another useful point: Its deficit estimates assume no change in current law. That is, they do not include the monumental increases in federal outlays that are certain to follow the passage of a new Medicare entitlement for prescription drugs for seniors. If someone wants to guarantee deficits as far as the eye can see, just pass that huge expansion of the entitlement state.

We've praised President Bush for keeping his eye on the prize of economic growth, but on spending control he's been disappointing, to say the least. He seems to think that the only way to get his essential increases in defense is to accept huge new domestic outlays. Perhaps he should ask the Members to choose guns or butter. In this time of war and deficits, he might discover that the voters agree with his priorities.