The New Mythology

December 17, 1962

The belief that inflation can solve all the economic problems of mankind has the immortality of the phoenix. Discredited a hundred times by its ultimately tragic consequences, it always rises again in a new form. Its present form is the conviction that whenever the economy needs a lift, the sure way to get it is by a big enough budget deficit.

In a report on Nov. 19, a majority of the President’s Advisory Committee on Labor-Management Policy called for a tax cut in 1963 of $10 billion. A few thought maybe a tax cut of $5 billion would be big enough. Some members urged that, in addition to cutting taxes, the government ought to increase spending. Nobody on the committee suggested that the government should actually reduce spending. The report never troubled to mention the $7.8 billion deficit already officially estimated.

The committee had no doubt that a thumping deficit was the way to “achieve and maintain fuller utilization of manpower, higher industrial operating rates, and a more rapid rate of economic growth.”

Just how deeply embedded the faith in deficits has become was illustrated by an article in The New York Times of Nov. 18: “Economically, there is no longer any essential disagreement among theorists over the fact [!] that deficit spending is a stimulus. . . . If the economy is not generating enough demand to keep it going at close to full tilt then the government must generate the demand, by deficit spending if necessary. . . . This view . . . is central to economic thought and theory in today’s world.”

PRINTING MORE MONEY

It is precisely because this has become the new orthodoxy—which one can challenge only at the cost of being dismissed as hopelessly out-of-date—that the government seems likely to launch on a policy that can only end in monetary collapse.

Let us analyze this theory a little. It assumes that all unemployment or business slack must be the result of “insufficient demand.” But by insufficient “demand” it always means insufficient money. The supporters of the theory want deficits because they want the government to shovel more money into the economy than it takes back in taxes in order that everybody will have more money to buy more things. In brief, they want more inflation.

The theory assumes that bigger deficits, more money, more inflation, will inevitably “lift the economy.” But they can do so only for brief periods and under special conditions. If union pressure forces some wage rates too high in relation to prices, then an added injection of money into the economy may increase either sales or prices, thus restoring sales or profit margins and enabling industry to pay the higher wage rates.

WAGE RATES IGNORED

But this result will follow only if: (1) It does not lead to still further wage demands, or (2) if the price rises are at least greater than the wage rate rises, and (3) if the added dose of money is expected to be the last one, and not merely the beginning of an indefinite number of doses. In the latter case the inflation will get out of control.

The deficit-idolaters always ignore wage rates, and their effect on employment. Under no conditions, apparently, do they think any wage rate should be adjusted downward to coordinate wages, prices, and profits and restore employment. Always the whole level of prices must be raised instead.

But unless distortions are removed from the economy, unless there is freedom, flexibility, and coordination of wages and prices, even the greatest dose of deficit financing cannot restore full employment. All it can do is to intensify our problems. Our costs are getting too high for competition in the world market. More deficits can only make them higher. The deficit in our balance of payments, the outflow of gold, the dwindling confidence in the dollar, are all the result of the inflation we have already had (from 27 deficits in the last 33 years). The prospect of still more inflation can only lead to a renewed outflow of gold, or a devaluation of the dollar and a profound shock to world confidence.