Dread of a Surplus

July 20, 1964

The last fiscal year ended on June 30 with a deficit of about $8.8 billion. This was more than the entire amount spent by Franklin D. Roosevelt in any fiscal year till 1939. It will be followed by a deficit in the current fiscal year officially estimated at $5.8 billion (and it will probably be much larger). The two deficits taken together will be the biggest for any two-year period in peacetime.

Yet no one showed any particular concern about this. The New York Times report hailed it as a great achievement. “The deficits in the last three years, while believed to have spurred the economy, have clearly not been inflationary.”

Most of the comment, indeed, has been to the effect that the deficit has not merely been harmless, but beneficial. And this reflects the present Administration’s own underlying fiscal philosophy, which is that a budget balance should be attempted only when the economy is at the level of “full employment.” This it defines as unemployment of 4 percent or less of the labor force. The President’s economic advisers have often expressed their conviction that previous efforts to balance the budget when the economy was operating with idle plant and idle labor only prolonged and increased unemployment.

Because of this fiscal philosophy the present Administration does not expect to see the budget balanced until the fiscal year 1967, which ends three years from now.

WHY BALANCE EVER?

But if the Administration’s economic assumptions are correct, why balance the budget even then—or at any time? If the country is enjoying full employment, as a result of deficit spending, why needlessly endanger that prosperity by returning to a budget balance?

We can be sure that, if ever the blessed full-employment goal were achieved, this argument would be put forward. And it is hard to see how it could be politically resisted. In fact, there are already commentators who contend that the government cannot afford ever again to run a surplus, and that balanced budgets are “economic suicide.”

It is instructive to recall the series of rationalizations that have brought us to this point. At first it was argued that a balanced budget was harmful only in “bad” years. The necessity of balancing the budget was accepted, but it should be only a “cyclical balance” over a series of years. But the cyclical theorists never revealed how long their cycle was, or how they or anyone else could know at any time just where we were in a cycle. If an average cycle is six years, say, then to offset the expected cumulative three-year budget deficit of $21 billion at the end of this fiscal year there would have to be an average $7 billion surplus in each of the next three years. The professed cyclical balancers would be appalled at such a prospect.

34 YEARS, 28 DEFICITS

So their theory is now that we should always run a budget deficit as long as there is any unemployment. And though we have already run 28 deficits in the last 34 years, they deplore only the six surpluses.

What will be the result if their theories continue to be followed? It was crushingly demonstrated in the ’30s that even heavy uninterrupted deficits cannot cure mass unemployment. But more deficits can and must lead to further increase in the national debt, further increase in the money supply, a further rise of prices, and a further depreciation of the dollar. The purchasing power of the dollar has already been reduced 63 percent since 1933 and 43 percent since 1945.

It is true that in the last ten years the dollar has depreciated “only” 12 percent. But this result looks good only in comparison with the dreadful international record. The New York First National City Bank’s annual review of comparative rates of depreciation shows that in the last ten years the German mark has lost 18 percent of its purchasing power, the British pound 23 percent, the Italian lira 25 percent, the French franc 34 percent, and the Argentine, Brazilian, Chilean, and Bolivian currencies respectively 91, 94, 95, and 97 percent.

Whether the deficits are “planned” or unplanned, the result is always the same.