ONE JULY

Half a year has gone.

Ah, but we have the World Cup, the (now dope-decimated) Tour de France and Wimbledon to entertain us. And of course we have the Fourth of July to give us pause to celebrate or at least think.

But the US economy gives us real pause. Somewhere between the firing in 2002 of President Bush's first Treasury secretary, Paul O'Neill, and the Senate confirmation this week of his third Treasury chief, Henry Paulson, the administration changed its tune on budget deficits. In the early days, the line was, essentially, that deficits don't matter. Mr. O'Neill's ouster was due in part to his gall in suggesting otherwise. Now, officials dutifully declaim that deficits matter, but that Bush-era shortfalls are "within historical norms."
Mr. Paulson apparently shares that view, having offered it repeatedly when asked about budget deficits during his confirmation hearing. That's a disappointment. It takes a narrow view of history to imply that the Bush-era deficits are "normal."
As a share of the economy, the Bush-era deficits have averaged 2.7 percent. That's the second worst record of any administration in the past 60 years, surpassed only by the deficits from the tenures of President Reagan and the first President Bush, which each averaged 4.3 percent. (Five years into the Clinton era, deficits averaged 1.2 percent of the economy, dropping to a mere 0.1 percent by the time Mr. Bush took over.) To imply that the current budget gap is comfortably within historical norms because it's not as bad as the worst deficits in modern memory is, to put it politely, a stretch.
Besides, size isn't everything when it comes to assessing the danger in budget deficits. Timing is also crucial.
The Reagan-era deficits occurred decades before the retirement of the baby boomers, when the post-World War II generation was in its peak earning — and taxpaying — years. The Bush deficits are uniquely alarming in that they're occurring on the eve of the baby boomers' retirement, leaving little time to recoup before the government has to meet large Medicare and Social Security obligations.
On top of that, and well outside the historical norm, is President Bush's insistence on continued tax cutting, despite the ongoing deficits and despite the fact that the economy has long since recovered from the last recession. From the end of World War II through the 1970's, various administrations hammered away at the nation's debt, reducing the burden from the wartime level of over 100 percent of the economy to about 25 percent. That effort was largely abandoned in the 1980's. But even Mr. Reagan backtracked on his budget-busting tax cuts of 1981 by raising taxes in 1982 and 1984. In 1990, a bipartisan deficit-reduction agreement raised taxes and cut spending, followed by another budget-tightening package passed by Democrats in 1993. In contrast, the Bush years have been marked by nonstop tax cutting, deepening debt, the abandonment of budget rules and increased spending, paid for by borrowing.
And not just any borrowing. The Bush-era deficits are also alarming in the extent to which they are foreign financed. Since 2001, 73 percent of new government borrowing has been from abroad. In total, 43 percent of the United States' publicly held debt of $4.8 trillion is in foreign hands, compared with only 14 percent at the peak of the Reagan deficits in 1983 and 30 percent in 2001. Debt owed to bankers in Beijing, Tokyo and elsewhere could destabilize the dollar and from there, drive up interest rates and prices.
If Mr. Paulson and other administration officials were to say that today's deficits were dangerous, it would logically follow to recommend scaling back the Bush tax cuts. By implying that the deficits are not so worrisome, they can continue to insist that spending cuts alone could fix the problem, even though that would mean deep cuts in Social Security and Medicare — something they are not willing to advocate explicitly. One can only hope that in discussions with his new boss, Mr. Paulson has more to say about the budget deficit than he let on during his confirmation hearing.