Why Deficits Hardly Matter

...Additional purchases of goods by the government, especially for the military, began to come on stream in significant volume by 1982...

...The long-term growth in living standards (from the '40s through the' 60s) was born in the huge deficits of the New Deal and World War II...

...In truth, a shortage of leadership and will inherited from the Carter Administration, not a shortage of resources, has prevented the U.S...

...Nor will they fall if we overthrow the conventional wisdom that Federal deficits are inherently bad and moves toward a balanced governmental budget are necessarily good...

...We would do well to remember that after 1937 (admittedly under the threat of war) the admonitions of conventional wisdom were ignored...

...The rates could then drop dramatically, reducing the cost of servicing the national debt and consequently helping somewhat to bring down the deficit...

...In the 1980 campaign Reagan was fond of asking, "Why should the government do a better job of spending your income than you...

...Reaganomics, by contrast, has caused a greater disparity between the rich and the poor, and has reduced community services at a pace that, if allowed to continue for the next four years, may result in their regressing to levels where the middle class will virtually disappear...

...This is due to the Reagan-Volcker 19th-century-type "incomes policies," which create slack markets and high unemployment to limit the power of labor and others to force wage and price increases onto buyers...

...This redistributive effect is not surprising, though, given the Reagan philosophy of "survival of the wealthiest...

...Blind acceptance of this 19th-century sophistry has caused many liberal economists and politicians to docilely concur that entitlement programs designed to alleviate poverty must be trimmed, and that the U.S...

...5. Foreigners who buy U.S...

...4. The resulting high interest rates are necessary to shield the economy from inflation...

...Lower business taxes since 1981 increased the after-tax profitability on these additional sales, encouraging more investment...

...3. It is absorbing half of net savings and hence is reducing productive capital formation...

...If followed, however, these prescriptions could make the 1982-85 period a replay of the 1933-37 years...

...The problem is not that there has been no increase in investment and consumption since 1982...

...But no one should pursue low inflation at the price of high unemployment...

...economy was transformed from its depressed condition to a modern cornucopia...

...it is that the stimulating Keynesian policies have not stepped up capital formation and consumer expenditures sufficiently to generate full employment in the U.S...

...These ancient tactics, based on a philosophy that New York's Governor Mario Cuomo in his keynote address to the Democratic Convention aptly called " Social Darwinism," have involved the deliberate reduction of aggregate demand to create the worst worldwide recession in a half-century, plus direct union bashing (remember the air traffic controllers...

...In so doing, these undertakings enriched everyone spiritually as well as economically...

...What is required is the kind of incomes policy Sidney Weintraub advocated in the pages of this magazine during the five years prior to his death in June 1983 —specifically, a tax-based incomes policy, or tip, that would control production costs and hold down inflation while preventing unemployment...

...objective a reversal of the trend over the past half-century toward an expanding government service sector and a more progressive tax and expenditure structure...

...The decline in interest rates since August 1982 has added to the value of the expected discounted cash flow from new investments, thereby reviving investment expenditures...

...The first year of the Reagan tax cut (starting in July 1981) was largely offset by higher Social Security and other levies, but the second and third stages of the tax cut raised real incomes (except for those with very low earnings), stimulating consumer spending and retail sales...

...As a result, he is the first incumbent since 1964 to face an electorate where the majority appears satisfied with the recent progress of the economy...

...Preachers of the conventional wisdom about the danger of deficits forget George Santa-yana's warning that those who do not study history are doomed to repeat its mistakes...

...Part of the problem may be that because we have not adopted a civilized incomes policy, such as tip, the high interest rates used to shield us from inflation in tandem with the rapid growth of the deficit have had undesirable side effects on domestic and international income distribution...

...President Reagan, who pays homage to that notion and goes so far as to support a balanced budget amendment (which would not take effect until after 1988), has ignored the conventional view in his economic policies aimed at rewarding the rich and starving the public sector, except for the military...

...Quite the contrary, it is the medicine that promoted the robust recovery of 1982-84 and lifted profits from the terrible depths induced by the 1979-82 Volcker Monetarist experiment...

...Indeed, the public's complacency regarding the large government deficit suggests that the average citizen is instinctively more sensible than many politicians running for office, let alone the conventional wisdom of their economic advisers...

...The belief that today's huge government deficits are absorbing too much savings and therefore squeezing out productive investment that otherwise would be occurring might have some validity if the United States, and the rest of the industrialized world, were already at full employment and businessmen were clamoring for more capital goods...

...The ability of Reaganomics to tame inflation is not very difficult to understand either once one abandons conventional wisdom's cliches...

...The seeming "success" of Reaganomics in limiting inflation and restoring economic growth has deflected the media from critically analyzing the benefits and costs of the conservative counterrevolution engineered by Ronald Reagan and Federal Reserve Board Chairman Paul Volcker, contributing to the image of the man in the White House as a Teflon President...

...Stripped of its rhetoric and jingoism, Reaganomics has always had as its basic Paul Davidson, a new contributor to the NL, is professor of economics at Rutgers University and editor of the Journal of Post Keynesian Economics...

...The extent of the backward slide would be directly related to the amount of tax increase earmarked for deficit reduction...

...Simply by raising the question he was suggesting that individuals had no social responsibility to contribute to the investment in education and community institutions, to aid those in ill health or poverty, beyond what they deemed to be in their own interests...

...UNCONVENTIONAL WISDOM Why Deficits Hardly Matter BY PAUL DAVIDSON The conventional economic wisdom being dispensed this election year by Democrats and Republicans alike is that the current size of the Federal deficit is ruining our nation's economic health...

...Why must it take calamities like a great depression or a world war to force us to dispense with the conventional wisdom and recognize some obvious economic fundamentals...

...By 1945 the annual deficit was approximately 25 per cent of GNP and government spending was roughly 40 per cent of GNP...

...In the election year of 1936, the government, bending to the warnings, moved vigorously to improve the situation—mainly by (shades of Ronald Reagan) reducing "unnecessary" government spending...

...Even though much of the deficit-financed expenditures were for wholly un-consumable war materials, the fact is that between the mid-'30s and the mid-'40s the U.S...

...Further, only at that point could government deficits be throttled with the hope that private spending would immediately pick up the ensuing slack...

...Although still quite high compared with past history, the lower interest rates of the last two years are the result of the Federal Reserve, in its "lender of last resort" function, deliberately abandoning its Monetarist experiment and rapidly expanding the money supply to avoid an impending Debt Crisis...

...2. It is being financed by excessive monetary expansion and is therefore inflationary...

...Thus the conventional wisdom maintains that eliminating the deficit is a top national priority...

...In any case, despite the huge deficits from 1981 on, the heavens have not fallen...

...The historical record indicates that when people join together out of a feeling of kinship and compassion, growth and prosperity for all inevitably follow...

...In these uncertain times, the desire for liquidity is quite high, and net investment is still constrained by the existence of some unused capacity as well as by concern about the profitability of added capital outlays...

...With such a civilized incomes policy, there would be no need for high interest rates to protect us from inflation...

...The present surge in investment spending from its depressed levels of 1979-81 is directly attributable to the August 1982 reversal of monetary policy just as the Reagan tax cuts were finally improving the after-tax income of employed middle- and upper-income families...

...from completing the New Deal, Fair Deal and Great Society reforms of the last 50 years...

...The great interest cost on government borrowing has fattened the purses of wealthy residents and foreigners who hold Treasury debt obligations at the expense of middle-and low-income taxpayers...

...We prefer to imagine the possibility of getting rich, rather than face the reality that, without the help of the community, most of us will remain relatively poor...

...The popularity of Reaganomics is readily explainable, for it appeals to those unpleasant yet ubiquitous human traits, selfishness and greed...

...Despite the rapid growth of the money supply during the past few years, inflation has not heated up, as Milton Friedman and his fellow Monetary economists had warned...

...Moreover, it is often argued that any additional taxes levied have to be earmarked for deficit reduction so that they will not be diverted to providing useful public goods and services for our citizens...

...Domestically, the New Deal, Fair Deal and Great Society programs—and, internationally, the Marshall Plan, Aid to Developing Nations, etc.—appealed to our sense of cooperation...

...In the past deficits might have been useful, we are told, but in 1984 our rising debt is "bad governmental policy" because: 1. We are approaching full production capacity (even with 7.5 per cent unemployment...

...The result was a drastic nine-month plunge in GNP in 1937, matching the rates of decline experienced during the Hoover era...

...Treasury bonds are laying claim to future American wealth...

...and simultaneously act as the engine for creating full employment abroad...

...In this election year of 1984, many prestigious economists are providing similar counsel and suggesting programs for an immediate reduction in the deficit to head off economic disaster...

...Increasing taxes before that state of bliss is achieved would merely slide us back into recession...

...In sum, the unprecedented deficit is not a symptom of illness in the economy...

...is too poor a country to afford the public works needed to rebuild its decaying cities, bridges, highways, and waterways...

...New taxes now would adversely affect any drive toward worldwide full employment...

...As for the current recovery, it is being sparked by traditional Keynesian maneuvers to stimulate the components of aggregate demand...

...A half-century ago, the conventional wisdom had it that the unprecedented New Deal deficits would bankrupt this country...