Deficits and Orwellby Alan Turin In George Orwell’s useful book 1984, Winston Smith, an Outer Party member, altered historic records at the Ministry of Truth, to conform them with present political diktat. When Airstrip One [ex-England] changed alliances, the record was altered to show the new alliance was the historic alliance. What "Big Brother" wanted was an historic record to show the new situation followed what "had" been set forth in the past. What does this have to do with the present federal deficit? America’s left is lying about their role in deficits as policy. What "those people" suggest is that they have always been opposed to federal budget deficits. Franklin "Day of Infamy" Roosevelt invented deficit spending as policy 70 years ago when he cobbled together his New Deal. Lying about federal spending, balancing budgets, keeping the gold standard and scads of other subjects [unhappily lying by politicians was neither invented by, nor ended with,...] FDR trounced the tax-increasing, Prohibition-enforcing, ever-regulating Herbert Hoover. Franklin Roosevelt’s volte-face once in power needed a justification. At first it was a pragmatic grab-bag of "doing something." My favorite remarks are those supporters of Roosevelt likening the New Deal to an American version of Mussolini’s fascism. Objections to deficits have been treated with, "If you divide the deficit into the current GNP ‘we’ have only a small portion of our national economy represented by the federal deficit." Or a popular appeal: "We owe it to ourselves!" Chief theoretician, John Maynard "My Theories Work Best in Nazi Germany" Keynes, gave his rationale in his General Theory [don’t buy it here or anywhere else]. Keynes held that the Great Depression proved classical economics [a pro-free market economic philosophy that followed a non-Austrian School tradition] had not cleared the labor glut. During the Great Depression there were willing workers whose wages [labor cost] had been cut, but still couldn’t find work. Here Keynes and other anti-capitalist fellow travelers engaged in a straw man argument. They accused the "powers-that-were" with being laissez-faire ideologues. Then further blamed the Great Depression on laissez-faire capitalism. That ignored the heavy, on-going intervention in the market by the State then:
What did Keynes recommend to end the Depression and further, to tame, the business cycle? Here is the Keynes formula in a nutshell: When times are good [full employment] the State should run budget surpluses. When times were bad the State should run budget deficits and spend the extra cash [either from borrowing, fiat money or those prior surpluses] on public works. The "extra" spent on public works would stimulate economic activity which was called "pump priming." The assurance that the resulting recovery would bring in more money than was used for the stimulus was called the "multiplier effect." Since 1933 there have been several years of "full" [The definition of fullness goes beyond "the glass is half full." Rather than define this to obscurantism, let’s pretend the bastards have a consensus of good times and that it occurred when the Left controls the civil government.] employment. However the only times that the federal budget balanced prior to the 1990’s was once under Truman, twice under Eisenhower and once at the straddle between Lyndon Johnson and Nixon terms. A 1990’s surplus, to use the cliché, "is not your fathers’ surplus." A real surplus should not increase debt, but that was the record. Under this Keynesian model [further refined by Samuelson and Galbraith] one might suppose there had been no economic good times from 1933-91 except for those four years. If this seems goofy to you, you are on the right track. Back to the Keynes-Samuelson-Galbraith formula: When times are bad the government should run budget deficits. The money to pay for the deficits should come from either fiat money [expanding the money supply] or borrowing or prior surpluses. That no surpluses have ever been generated via this method begs the question of whether Keynes policies has brought real prosperity. In fairness to Keynes, he did point out his theories worked best in countries were the government was in total control of the means of production and distribution. Now let’s move from Keynesian "economics" to history. From the New Deal until 1981 when Congress would vote to authorize raising the federal debt limits, many Congressional Republicans would make speeches warning against the evils of deficits. Then came 1971 and a weird lacunae. Richard Nixon announced a new orthodoxy. Dr. Gary North could write better on this subject as he, Murray Rothbard and a remnant of economists criticized his moves. Nixon moved to end gold convertibility of the dollar, devalued the dollar, imposed wage and price controls to fight 6% per annum price inflation and announced domestic spending goals that would ASSUME the budget was in balance. Lest we forget Richard Nixon’s immortal words, "We’re all Keynesians now." Pre-New Deal politicians decried as a "necessary evil" budget deficits, fiat money and debt. Post New Deal politicians, particularly those left of center, were now arguing that deficits, debt & fiat money were a positive good. Nixon wanted Republicans in on the same [New?] deal. Then came Ronald Reagan [Actually, there came Lloyd Bentsen, Jack Kemp, Chuck Roth, Jude Wanniski, Paul Craig Roberts, but it sound more dramatic this way.] who took the Keynesian argument, but added a free-market twist. Instead of spending the deficit on public works [state-managed spending], Reagan said let’s spend the deficit into the private sector [taxpayers keeping a tad more of their earnings to spend as they chose]. Call it "Right-wing Keynesianism" or as the pundits called it then "Reagonomics." Reagan’s [and those other bracketed fellows noted above] insight was derived from sound free market economics. There are limits to state action, whether it comes to regulations or taxes or war-fighting. We had in 1981 a tax rate that deterred economic activity. Positing that there was better information, better direction due to motivation in the private sector, moving a portion of the deficit to private sector would have a good effect. As we all know, it did. What were the inventors of Keynesian deficit-spending to do about this upending of their vision with this, free-market modification of deficit spending? Winston Smith goes to the Beltway. Liberals in America were "shocked, shocked" that the federales were running a huge deficit! Franklin Roosevelt’s argument of good deficits was consigned to the memory hole. The present deficit lacks the ideological fire of twenty years ago, but that hasn’t stopped "those people" from denouncing deficits with the fervor of the newly converted. Or the newly forgetful. But it hasn’t stopped Beltway liberals from denouncing deficits. What is Winston Smith doing today? He is obscuring the fact that the "surplus" was bogus, which calls into question the deficit itself. The open and notorious secret regarding deficits per se was nonsense. The recent "surplus" was achieved, as it could have been achieved at any point in the past 70 years, by adjusting spending increases at a rate slightly below the rate of tax revenue increases. The real objections the left has to deficits are two-fold.
Remember that for fifty years deficits were, for the left, a positive good. One conservative president steals their thunder and deficits were written out of their history. Next time you here "those people" talk about the deficit look at the hangers on. If you look carefully you’ll see Winston Smith and you’ll know. March
9, 2002
Alan Turin [send him mail] an attorney by training, works in the computer industry. Copyright 2002 LewRockwell.com |