That ‘Fiscal Revolution’

August 10, 1964

The Republican Platform points out that the Democratic Administration has “burdened this nation with four unbalanced budgets in a row, creating deficits totaling $26 billion, with still more debt to come, reflecting a rate of sustained deficit spending unmatched in peacetime.” And the platform goes on to pledge a reduction of not less than $5 billion in Federal spending and “an end to chronic financing, proudly reaffirming our belief in a balanced budget.”

It is true that this does not go as far as the Democratic Platform on which Franklin D. Roosevelt was elected in 1932, which promised “a budget annually balanced,” but some people are alarmed because the Republicans mentioned a balanced budget at all. In doing so, Edwin L. Dale, Jr. contends in The New York Times (July 14), they “have rejected the fiscal revolution of the 1960s. They have done so even though, so far at least, the revolution seems to be proving a smashing success.”

“The revolution,” Dale goes on, “is quite simply a rejection of the desirability of a balanced budget until such a time as the economic boom achieves full employment.” And though the Administration has not “trumpeted” this “revolution,” it has in fact “begun to use the Federal budget as an economic weapon in the spirit of the late Lord Keynes, with a result that budget balance has been purposely postponed.”

To describe planned deficits as revolutionary is like describing intentional profligacy or irresponsibility as revolutionary. In the history of government, deficits are older than surpluses, and probably more frequent.

OLD AS JOHN LAW

The only thing that could conceivably be called new is the praise and glorification of deficits and paper money, but even this can be traced back two and a half centuries to the days of John Law.

The records of the past do not support the theory that deficits cure unemployment. In each of the ten 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 deficits averaging $21 billion a year combined with more than 14 million annual unemployed.

All prolonged unemployment is the result of some discoordination in prices and wages. The champions of planned deficits assume that it is impossible to resist excessive union wage demands, and that the only way to restore or maintain full employment is to keep injecting more monetary “purchasing power” into the economy to make the higher wages payable. Under certain conditions, such as those that have been prevailing in recent months, a deficit increased or continued by tax reduction can temporarily bring prosperity and more employment.

SHORTSIGHTED

But advocacy of prosperity through deficits is advocacy of a shortrun policy—one might also say, of a shortsighted policy. The advocates do not ask themselves how long this policy can be kept up and what its long-run consequences must be. These long-run consequences are plain to anyone who cares to look for them. We can see them in the inflations in Europe today, especially in the inflationary crisis in Italy. We can find an extreme example in Brazil, where the new regime is in trouble because of the 40 percent rise in living costs in the first six months of this year (on top of an 80 percent rise last year), accompanied by signs of a recession and rising unemployment. The new regime, dispatches report, is trying “to reduce the government’s operating deficit, regarded as the main cause of the inflation.”

No doubt our present deficit prosperity can be kept going quite successfully until the election and even beyond. But anyone who thinks that there will be no unpleasant aftereffects should recall: (1) that our cost of living has gone up 72 percent since the end of World War II in 1945; and (2) that our cumulative balance-of-payments deficit has been wholly the result of our government deficits and inflation since 1957, and that further inflation can only make the problem worse.