When do deficits matter? While Democrats and Republicans switch sides, economists try to pin down a tipping point.

• Author: de Rugy, Veronique
• Position: Columns

ON JANUARY 5, The New York Times reported that "the incoming Democratic chairmen of the House and Senate Budget Committees today called upon the President to work with them on a deficit-reducing package that would include tax increases and spending cuts." Concerned that deficit projections were unrealistic because they didn't include military costs, Democrats urged the administration to increase taxes on the wealthiest Americans.

That was January if, 1987. Ronald Reagan was president, and the deficit had reached almost 5.4 percent of gross domestic product (GDP). Now, three decades later, Democrats have changed their minds about the dangers of deficit spending. In February 2009, the nonpartisan Congressional Budget Office estimated that the deficit will reach $1.2 trillion this year--roughly 8.3 percent of GDP. That giant increase is attributable mainly to Washington's September 2008 bank bailout and the federal takeover of mortgage lenders Fannie Mae and Freddie Mac.

And that figure assumes that the 2009 budget issued last year by the Bush administration will stay at its proposed level, which it surely won't. The calculation does not include the cost of the Iraq and Afghanistan wars, and it doesn't include the chunk of the new $787 billion stimulus bill that will be spent in 2009. Add all these numbers together, and the deficit swells to $2 trillion, or roughly 13.5 percent of GDP (see Figure ).

This is by far the highest share of the economy that deficits have taken up since World War II. It is well over twice the record set by Ronald Reagan in the 1980s. Yet we don't see Democrats denouncing the deficit explosion on the network news, like they did two decades ago.

The Democrats aren't the only ones who have reversed their opinions about deficits. Republicans were relatively comfortable with Reagan's unbalanced budgets. And when President George W. Bush turned a massive surplus into a series of giant deficits, few in the GOP objected. During the administration's internal debates over proposed tax cuts in 2002, Vice President Dick Cheney reportedly told Treasury Secretary Paul O'Neill that "Reagan proved deficits don't matter."

In a 2007 interview with Fortune, Cheney refined his position, explaining that "you've got to evaluate them relative to other priorities. Another priority, for example, would be defending the nation in wartime."

In other words, if the spending that creates deficits supports your party's programs, fiscal...