The late Herbert Stein, Chairman of the Council of Economic Advisors in the Nixon administration is credited with the observation “if a trend can’t be sustained indefinitely, it won’t be”. Asking Why Are We Ruled by These Fools? the normally equable Brad DeLong presents budget projections showing a deficit equal to 17.5 per cent of GDP in 2060 (gross debt around 250 per cent of GDP) and observes that the 2003 Bush Budget has put the US on a path to national bankruptcy. Fiscal conservative Andrew Sullivan is almost equally scathing. (I must, therefore, withdraw my previous assessment of him as a reliable Bush supporter.)

Although 2060 is a long way away, it’s important to observe that even the short-term projections showing continuous but modest deficits for the next decade are based on over-optimistic growth projections. And there’s nothing for a war on, and occupation of, Iraq or for reforming the Alternative Minimum Tax – between them they will probably add $150 billion per year indefinitely to the deficit.

Given the pace at which the official estimates have deteriorated, my guess is that the crisis will be clearly apparent by Inauguration Day in 2005. By then, even the official estimates will show deficits chronically in excess of 5 per cent of GDP, which is generally recognised as the critical point. If Bush is re-elected, my guess is that the likely resolution will involve some form of repudiation of US government obligations. Either Social Security and Medicare will be cut drastically or the printing press will be used to solve the public debt problem. The latter seems more in keeping with the Bush style.

The 2003 Budget is based on the idea that large tax cuts will make it politically impossble for a subsequent Democratic Administration to increase expenditure. Kim ‘small target’ Beazley fell into this trap in 2001. Given the size of the crisis, any Democratic candidate who wants any chance of a second term must run on a platform of repealing Bush’s tax cuts, that is, soaking the rich. My guess is that, as with Beazley, most of the Democratic hopefuls will wimp out, and the primary process will weed out those who don’t.

Update We can drop the ‘almost’ in “Andrew Sullivan is almost equally scathing”. He now says:

I’ve been trying to give him the benefit of the doubt, but his latest budget removes any. He’s the most fiscally profligate president since Nixon. He’s worse than Reagan, since he’s ratcheting up discretionary spending like Ted Kennedy and shows no signs whatever of adjusting to meet the hole he and the Republican Congress are putting in the national debt.

This raises the question of how Bush is going to pay for the lengthy occupation and reconstruction of Iraq supported by Sullivan and others. Those in the Administration who favour a quick decapitation of the regime, the destruction of as many weapons as possible and immediate withdrawal will have a powerful fiscal argument in their favour.