Credit

Deficit Looms as an Election Issue

Added interest-rate pressures that could burden the economy are a cause for concern, some observers say.
Marie LeoneNovember 1, 2004

While foreign policy and the war in Iraq take center stage as the U.S. heads into the presidential election, the economy—particularly the federal deficit—still resonates with CFOs.

All things being equal, bigger federal deficits mean higher interest rates, and “no one has a keener appreciation of the impact of the deficit on interest rates and the cost of capital than financial executives,” Ron Fink reported in “It’s the Deficit . . ..”

Indeed, finance chiefs aren’t comfortable with the current deficit. According to a survey of 145 CFO readers, 86 percent said they were concerned about the size of the deficit, which the Congressional Budget Office predicts will reach $2.7 trillion by 2014. So far, the deficit has grown to over $400 billion, which is still short of the Treasury department’s $600 billion prediction for 2004.

Despite the finance executives’ deficit concerns, however, 75 percent believe President George W. Bush would be better for business than Sen. John Kerry would be, the survey noted.

Part of that confidence might be bolstered by the president’s budget plan, which calls for cutting the deficit in half over the next five years. The plan aims to keep growth in non-defense, non-homeland-security discretionary spending below 1 percent, policy officials involved with the Bush-Cheney re-election campaign note. In fact, according to the Bush-Cheney Web site, the president intends to maintain economic policies that will “increase Treasury revenues, while holding the line on federal spending.”

But not everyone is convinced of those claims. Although CFOs and other executives, demonstrate confidence in the incumbent’s economic policies, some traditionally pro-business observers aren’t sure that the administration’s policies will help reverse the upward deficit trend, especially in light of what may be needed to fund the war and homeland security efforts.

For example, in a personal endorsement of Kerry, Scott McConnell, the executive editor of The American Conservative, wrote that financing the war in Iraq has ballooned the deficit and that its current size will impede economic progress. (The magazine also published endorsements of President Bush and Michael Peroutka, the Constitution Party candidate, by its two other top editors.)

Meanwhile, the editors at the Economist magazine put foreign policy first in their endorsement of Kerry. However, they cite future federal budget deficits as a threat to the U.S. economy. (The Economist Group is the parent company of CFO and CFO.com.)

In addition, last month, 169 business school professors—including Nobel laureates Robert Merton and William Sharpe —critiqued the deficit and current economic policies in an open letter to President Bush. The scholars, who teach at such B-schools as Harvard, MIT, Dartmouth, Stanford, Duke, Northwestern, and the University of Pennsylvania, argued against cutting taxes in the face of a mushrooming deficit. “These sorts of deficits crowd out private investment and are politically addictive,” wrote the professors. “They place a heavy burden on monetary policy —and create additional pressure for higher interest rates —by stoking inflationary expectations.”

“The letter wasn’t signed by a bunch of bleeding-heart liberals,” asserts Dartmouth’s Leonard Greenhalgh, “but by business and economic scholars who are at the top of their professions.” Greenhalgh is a professor of management at the college’s Tuck School of Business, and one of the academics who signed the October 4 letter.

While the letter admits that running a budget deficit in response to a short bout of recession is sometimes warranted, it points out that running large structural deficits over a long period isn’t practical. The letter’s implication for CFOs, remarks Greenhalgh, is that continued deficit spending will deepen the recession.

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