Introduction

America is at a fiscal crossroads. In the last six years, the Bush administration has turned a surplus projected to be $5 trillion over 10 years into a deficit projected to be more than $2.8 trillion. It would be one thing if all this new debt was being racked up to finance public investments that would expand economic opportunity for the middle class. But the surplus has instead been squandered on tax cuts for the wealthiest slice of American society and a wasteful governmental spending spree. Some of the least defensible expenditures in that spending spree have been well publicized -- egregious pork-barrel projects, midnight earmarks, and the like -- but the profligacy has actually gone well beyond that. Among many other things, the administration has frittered away taxpayers' money by building up a massive new shadow government of private contractors that is now four times the size of the career civil service. What ever happened to fiscal responsibility?

The president claims that his 2008 budget proposal will return the government's books to balance in five years. But there is no reason to believe him. At this point, his credibility as a fiscal conservative is as solid as Jell-O. In six previous attempts, his administration has consistently failed to submit a budget that holds water. In keeping with that pattern, its latest effort is full of rosy economic scenarios and strategic spending omissions. It does not take full account of the real costs of the war on terror, for example, or the cost of reforming the alternative minimum tax (AMT), which nearly everyone concedes is essential.

Three years ago, in a progressive deficit-cutting proposal entitled "A Return to Fiscal Responsibility," PPI predicted that if the country's fiscal policies were not changed, "the coming decade is likely to rank as the most fiscally irresponsible in our nation's history." Unfortunately, that statement has turned out to be all too prescient. With three years still to go in the president's second term, the first decade of the 21st century has already set a new record for the most debt generated in a ten-year period. This fiscal recklessness is both an economic albatross for the country and an abdication of Washington's responsibility to the citizens and taxpayers it represents.

The economic rationale for restoring fiscal discipline today is different than the one the Clinton administration embraced in the 1990s. Then, cutting the enormous Reagan deficits and balancing the budget were rightly seen as integral to economic growth. Reducing government borrowing kept long-term interest rates down, unleashing new private investment that spurred record-breaking economic growth.

But global capital markets have grown much larger today. An abundance of ready lenders with relatively cheap capital has made it easier for the Bush administration to run large budget deficits without driving up long-term interest rates. As a result, many Republicans -- and some liberals -- have stopped worrying about fiscal discipline and learned to love deficit spending.

But they are wrong. A balanced budget may no longer be as potent a stimulant to growth as it was in the 1990s, but as University of Chicago and PPI economist Austan Goolsbee argues in a companion paper to this one, deficits still matter. Goolsbee illustrates how the big Bush deficits amount to a triple whammy: They place an unfair financial burden on future generations, they weaken the government's ability to respond to national crises, and they expose America to the whims of foreign lenders and central banks. Conversely, whittling the Bush deficits down to manageable proportions would provide a national insurance policy against global financial shocks and reduce the leverage that foreign lenders exercise over America's economic health.

While the economic consequences of deficit financing have changed somewhat, the political and moral case for fiscal discipline has not. Spending the taxpayers' money with wisdom and restraint remains an important marker of political responsibility and accountability. Just ask the Republicans, whose reckless spending contributed to their losing control of Congress in the 2006 midterm elections. Today, just as in the early 1990s, it is up to the Democrats to restore fiscal sanity in Washington and thereby rebuild public confidence in progressive government.

Eventually, we need return to a period of sustained surpluses that will allow us to begin paying off our national debt and ensuring the long-term financial viability of Social Security. However, it took the Bush Republicans six years to dig the nation into a deep fiscal hole, and it will take some time to climb back out again. Therefore, at least in the short term, it may make sense, as Goolsbee has suggested, for the United States to run small deficits -- on the order of 1 percent of gross domestic product (GDP), instead of the 3 percent or 4 percent of recent years.

This paper shows how. It lays out a detailed blueprint for reducing the Bush deficits by $1.88 trillion over the next 10 years with a hit list of spending cuts, steps to restore budget discipline, and tax reform that will make a down payment on restoring progressivity and fairness.

Paul Weinstein Jr. is the chief operating officer and a senior fellow at PPI and lectures at Johns Hopkins University. Katie McMinn Campbell is a policy analyst at the Democratic Leadership Council.