How New Is Inflation?

October 19, 1964

When the 88th Congress finally adjourned, a section of the press broke out in paeans of praise for its accomplishments. Typical was a “news” story on the front page of The New York Times, announcing that what was “likely to earn high ranking in history’s catalogue of achievements” was the expiring Congress’s action in “approving an $11.5 billion tax cut despite rising budget deficits.”

This, it seems, is precisely what is called for by “modern economic theory.” This requires tax cuts, even in the face of huge deficits, “in times of sluggish economic activity and high unemployment.” It has suddenly been discovered by economists, it appears, that “a tax cut, by giving families and business more money to spend, [would stimulate] demand for goods and services, thus increasing production and creating jobs . . . If the theory is valid, Congress has now embarked on a course that may be of vast importance in improving the country’s living standards, both immediately and in the long run.”

FOLLY OF PRUDENCE

If the theory is valid, indeed, then all statesmen of the past, who thought they were acting prudently and responsibly in trying to avoid bankruptcy or inflation by keeping expenditures within revenues, were merely fools. For by withholding handouts from pressure groups, and insisting on keeping taxes high enough to pay for necessary expenditures, these people were not only creating unemployment and depression, but imperiling their own re-election. If the theory is true, then the politicians who vote huge handouts to pressure groups, and refuse to impose the taxes to pay for them, are not, as previously assumed, irresponsible demagogues, but public benefactors. The same actions that buy elections also confer economic blessings on the whole community.

If the theory is true, does it have any limits? And what are they? What would be wrong, for example, with doubling the amount of Federal expenditures and abolishing taxes entirely? Wouldn’t this give families and business still more money to spend, still further stimulate demand for goods and services, and still further increase production and jobs?

Alas, the practice is not new and the theory is neither new nor true. Budget deficits go back to time immemorial. The theory of deficits, paid for by printing more paper money, can be traced back to the very beginning of our history as a nation. The Continental Congress began its disastrous issues of paper money in 1775, because it was afraid to levy taxes. Peletiah Webster, writing in 1790, quotes a member of that Congress as saying: “Do you think, gentlemen, that I will consent to load my constituents with taxes, when we can send to our printer and get a wagon-load of money, one quire of which will pay for the whole?”

PAST FAILURES

If the theory of the beneficence of deficits is new this year, why have we had 28 deficits in the last 34 years?

That deficits do not cure unemployment has been shown over and over again in the last half century. In each of the years from 1931 to 1940 inclusive, the Federal government ran a deficit averaging 3.6 percent of the gross national product. During those ten years there was average unemployment of 18.6 percent of the labor force. The same percentage of GNP and of the labor force today would mean that even deficits averaging $22 billion a year could be accompanied by more than 14 million annually unemployed.

The inflation brought about by “planned” deficits (either through increased spending or tax cuts) can under special conditions, it is true, bring about a temporary increase in prosperity. There is no doubt that our present prosperity and reduction in unemployment owe a lot to recent tax reduction. (The employment record is nothing to brag about, however. Unemployment is still above 5 percent, compared with an average of 4.9 percent in the eight Eisenhower years.) But as soon as the new money in circulation begins to reflect itself in higher prices, and as soon as wage rates, under the stimulus of the automobile settlement, take off on a new round of rises, the present euphoria may give place to sober second thoughts about the unadulterated magic of deficit spending.