Deficits Solve Nothing

December 31, 1962

President Kennedy’s speech before the Economic Club of New York was a mixture of the sound and the unsound. He said many good things and sometimes said them admirably. He warned that our balance-of-payments problem places limits on monetary inflation. He warned against the demoralizing effects of “increasing Federal expenditures more rapidly than necessary.” He recognized the need to reduce “the burden on private income and the deterrents to private initiative.” He pointed out how our present tax system constitutes “a drag on growth” because it “siphons out of the private economy too large a share of personal and business purchasing power” and reduces the “incentives for personal effort, investment, and risk-taking.”

The Federal government’s most useful role, Mr. Kennedy recognized, “is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures.” He insisted that “corporate tax rates must also be cut to increase incentives and the availability of investment capital.”

The President also stated admirably the need for tax reform and some of the objectives of such reform. He pointed out how our present tax system distorts economic judgments and inhibits economic growth. He courageously urged reduction of “the oppressively high rates in the upper brackets.” He emphasized the need of improving profit margins and increasing “the incentive to invest and the supply of internal funds for investment”; of arousing a “new interest in taking risks, in increasing productivity, in creating new jobs and . . . long-term economic growth.”

CUT SPENDING FIRST

But in spite of these correct perceptions, the President did not draw the correct conclusions for practical action, because he looked at only one side of the problem. We do need tax reform. We do need tax reduction. But we cannot afford to reduce taxes unless we are also willing to reduce the Federal spending that makes the taxes necessary. Yet the President holds out no prospect whatever that Federal spending will be reduced. On the contrary, “defense and space expenditures will necessarily rise.” The most the President promises is that “the total of all other expenditures combined will be held approximately at its current level.”

What does this mean? In the current fiscal year we are heading into a deficit already officially estimated at nearly $8 billion. This will be the 27th deficit in the last 33 years. The President’s advisers have been publicly recommending a tax cut in the neighborhood of $10 billion. This could mean a deficit in the next fiscal year of $18 billion. Add a couple of billion to expenditures, and you get a deficit around $20 billion.

A TEN-YEAR TRIAL

The President and his advisers seem to believe that deficits themselves, by increasing “purchasing power,” will increase prosperity, eliminate unused capacity, bring full employment, and thereby increase revenues and so restore a balanced budget. This beguiling fantasy has been floating around for 30 years. It is part of the reason why we have already had 27 deficits in 33 years. It is a complete delusion.

Deficit spending as an economic panacea has had a thorough trial. It got an uninterrupted test in the ten fiscal years from 1931 to 1940, inclusive, in which there was a deficit every year. The average annual deficit was $2.8 billion, or 3.6 percent of the gross national product of the period. The same percentage of the gross national product today would mean an average annual deficit of $19.7 billion. The average unemployment in that ten- year period was 9.9 million. This was 18.6 percent of the total labor force. The same percentage of unemployment today would mean 13.9 million jobless.

But though deficits brought about by cutting taxes would probably be futile in restoring full employment, they would not be harmless. On the contrary, they would undermine domestic and foreign confidence in the dollar. They would lead foreigners to drain us of our gold supply. And they would eventually let loose an uncontrollable inflation.