Can We Afford to Balance the Budget?

...And the more readily observable facts have contradicted the dire pronouncements of the professionals, the more prestigious and acclaimed have they become—in the New York Times, on Wall Street and at Harvard...

...As economic conditions worsen during the coming recession, it holds pressure will build to resolve the situation in a manner similar to the solution of 1980-82— namely a regressive redistributive tax cut under some supply-side slogan...

...Whatever the rationale, it does not change the true cost of Gramm-Rud-man...

...BY PAUL DAVIDSON Public opinion polls taken in recent months have indicated that a large majority of citizens favors reducing the huge Federal deficit...

...Numerous observers therefore doubt Americans are really willing to pay the price of deficit reduction...

...In the Eisenhower Administration, Secretary of the Treasury George M. Humphrey verbalized the conventional wisdom by noting that he "had never heard of a person who could spend himself rich...

...Walter Mondale, whose domestic platform rested on the same thinking that underlies Gramm-Rudman, was buried in a landslide of good economic news as Reagan continued to pursue the largest Keynesian deficit spending program the country ever experienced...

...of the Great Recession of 1979-82, and the subsequent steady improvement has primarily been a function as well of not attempting to rein in Reagan's deficits...

...No one is going to build more capacity, regardless of the interest rates, when too much already exists...

...The deficit has doubled since Ronald Reagan took office in 1980...

...Backing Gramm-Rudman permitted incumbents to demonstrate that they are against the sin of excessive-ness without explicitly lowering the voters' living standards...

...Well, it appears the public's response to the pollsters has merely reflected what television and the print media have continually publicized as the "conventional wisdom" that deficits are bad...

...At the onset of the international depression of 1980-82, the other major nations started reducing their deficits as a percentage of GNP...

...Where consciences troubled, there were two possible rationales for agreeing to support a measure that could plunge the nation into a severe recession: The first assumes that reducing Federal borrowing will cause interest rates to drop, and thereby stimulate sufficient investment in new plant and equipment to offset the decline in government demand for the products of industry...

...As I have pointed out in these pages ("Why Deficits Hardly Matter," NL, August 20,1984), in 1937 explicit legislative actions aimed at balancing the budget induced a dramatic nine-month plunge in GNP, matching the rates of economic decline under Hoover...

...Hence, even if interest rates were to come down as a result of Gramm-Rudman, there is no reason to expect businesses will embark on a spontaneous investment boom...

...would "have a depression that would curl your hair...

...The real question is, can we as a society afford the reduction in jobs and GNP— the recession—that the activation of Gramm-Rudman will produce...

...and Ernest F. Hollings (D-S.C...

...For the road to a balanced budget will return us to the era of more than 10 per cent unemployment, substantially reduced profits, and large-scale bankruptcies brought on by the reduction in aggregate demand that must be a consequence of some combination of less government spending and tax hikes to meet the terms of Gramm-Rudman...

...And that cost, in my view, will be the impoverishment of America and the stripping of the cohesive social fabric woven via cooperative redistributive legislation that has made us an enduring, civilized economic society...

...The U. S. economy—its present 7 per cent unemployment notwithstanding— has also shown remarkable vitality compared with the rest of the free world over the last three years...

...You might wonder whether Congressmen who preached the urgency of mandating an end to the deficit realized that, all other things being equal, this amounted to legislating a recession and significant increases in unemployment...

...Warren B. Rud-man (R-N.H...

...Nor has a cry gone up against letting inflation whittle down income transfers to the poor...

...Both the former chairman of the President's Council of Economic Advisors, Martin Feldstein, and the former director of the Office of Management and Budget, David Stockman—the Chicken Littles of the first Reagan Administration—repeatedly warned of the impending doom due to such spending...

...Clearly our Federal deficit will become a serious economic problem (not only to ourselves, but to our friends abroad) only when, as Gramm-Rudman requires, we start doing something to lower it...

...It is an extension of what New York Times columnist Tom Wicker calls the "shrewd political theory," which seeks to reverse the trend of the last half century toward a more equitable redistribution of income...

...Unfortunately, the well-meaning legislators who reason in this fashion fail to recognize a critical fact: Although much idle plant and equipment was put to work again in 1982-83 as Reagan's Keynesian recovery got under way, plant utilization has fallen since mid-1984 despite the GNP's continued growth because of deficit spending...

...But the politicians, faced with the public opinion polls, wanted something to satisfy their constituents...

...From a cynical standpoint, it could be argued that Gramm-Rudman is one of the best things that has happened to the Democrats politically since passage of the Smoot-Hawley Tariff in the Hoover Administration...

...President Reagan, ignoring his own balanced budget-amendment rhetoric during the 1984 election year, was triumphantly returned to office...

...If the government did not end its profligate ways, he cautioned, theU.S...

...There has been no public ground swell, though, for either raising taxes or cutting government services that affect middle-income living standards...

...By contrast, those years where Franklin D. Roosevelt did not worry about the deficit were the basis of economic growth and prosperity...

...Ultimately, the real issue raised by the new legislation is not whose taxes will have to be increased, or whose goodies Uncle Sam will have to curtail or eliminate...

...This rate of indebtedness cannot go on, many have exclaimed...

...The second rationale is, in its substance, more pernicious to our social structure...

...forcing deficit cutbacks over the next five years that will achieve this...

...In Congress, the apparent selfishness of individuals and vested interests has reinforced the feeling that tax increases per se remain unpopular, and that a significant segment of the voting population is opposed to any lessening of government largess...

...They have enjoyed little growth—except for the sales of their export industries to the U.S., which have risen pari passu with the Reagan recovery...

...Still, they were responsible for nudging the economy out Paul Davidson, professor of economics at Rulgers and editor of the Journal of Post Keynesian Economics, is currently working on a book to be entitled Economics for a Civilized Society...

...How, then, does one explain the polls supporting a balanced budget, which prompted Congress' rush last month to vote for the bill sponsored by Senators Phil Gramm (R-Tex...

...Of course they did...

...Although current purveyors of the judgment have not been able to coin such delicious epigrams, they have effectively bombarded the public with an equivalent message...

...Today the Federal government" owes" $2 trillion...

...Indeed, his unswerving Keynesian actions seemed to virtually ensure him a place in history as the savior of American capitalism and the most popular President since FDR...

...Given these circumstances, it is not surprising the public has been brainwashed to fear deficits will cause the economic sky to fall...

...Its adoption signals the end of the euphoric phase of expansionary Reaganomics, and paves the way toward reducing Reagan's image in the history books as the promoter of unprecedented prosperity...

...Past experience further suggests this was predictable...

...No wonder President Reagan signed this bill in the privacy of the Oval Office, without any public display or photo opportunity...