Cream of the Crop 11/Cream of the Crop 11-1.iso/faq/thayer.zip/THAYER.TXT

Text File | 1995-12-28 | 11KB | 318 lines

Do Balanced Budgets Cause

Depressions?



By Frederick C. Thayer,

Professor of Public Administration

George Washington University



During the loud and widely accepted argument asserting that
balancing the federal budget and reducing the national debt will
bring an era of prolonged prosperity, little attention has been
given to the consistently startling historical record.



At the end of World War I, Democrats and Republicans alike
concluded that it was time to return to the "normal" situation
of balancing the federal budget and reducing a national debt
that had increased markedly during the war. While President
Warren Harding used "return to normalcy" as a successful
campaign slogan, it was the prior administration of President
Woodrow Wilson that actually reduced the national debt in 1920.
From that year through 1930, the annual budget remained in
surplus and the national debt was reduced by 36 percent, to
$16.2 billion.



The Great Depression began in August of 1929. The question to be
asked is whether the anti-public-spending crusade of the 1 920s
had anything to do with its onset and with the fact that the
depression did not end until the onset of World War II.



Even though the sequence that begins with budget-balancing and
ends with depression has been common in American history, the
question of a linkage has been ignored. The following paragraphs
include all the basic data:



1817-21: In a period of five consecutive years, the national
debt was reduced by 29 percent, to $90 million. The first
acknowledged major depression began in 1819.



1823-36: In a period of 14 consecutive years, the national debt
was reduced by 99.7 percent, to $38,000, a virtual wipeout. This
didn't help either. A major depression began in 1837.



1852-57: In a period of six consecutive years, the national debt
was reduced by 59 percent, to $28.7 million. A major depression
began in 1857.



1867-73: In a period of seven consecutive years, the national
debt was reduced by 27 percent, to $2.2 billion; A major
depression began in 1873.



1880-93: In a period of 14 consecutive years, the national debt
was reduced by 57 percent, to $1 billion. A major depression
began in 1893.



1920-30: In a period of 11 years the national debt was reduced
by 36 percent, to $16.2 billion. The sixth real depression --
the Great Depression-began in 1929.



As opposed to many less important downward "business cycles" or
recessions, these six collapses have been the only major
depressions in U.S. history. The batting average is perfect-six
sustained periods of reducing the national debt followed by six
major crashes.



Since 1791, these debt reduction crusades have colored 57 of the
93 years in which the national debt was reduced. The debt was
increased in each of 112 years, an indication that federal
deficit spending has been anything but unusual. We have had
almost chronic deficits since the 1 930s, and there has been no
new depression since then-the longest crash-free period in our
history.



CAUSE AND EFFECT? What does the record prove?



According to the rules of science, no single proposition ever
can be "proved" beyond question. So the repeated sequences
outlined above may be only coincidences -- not correlations, not
valid associations, not clear evidence of cause and effect. But
myths should be subject to similar skepticism. There is no
evidence at all that balancing the budget and paying down the
national debt has ever sustained national prosperity even in the
most perfect situation imaginable -- one with no national debt
at all. There is simply no empirical support for one of
America's most dominant myths.

The defenders of the myth engage in obvious violations of
intellectual ethics. To begin with, they simply ignore the
record of history. In so doing, they imply that the record is
unworthy of attention.



The second violation is to insist that those who question the
balanced budget ideal must provide overwhelming evidence to
support such challenges, while defenders of the myth are
subjected to no such standard.



The third violation is to use absolute numbers ("hundreds of
billions!" "trillions!") as a scare tactic when only relative
comparisons make sense. Relative to the Gross National Product,
or GNP (now replaced by the Gross Domestic Product, or GDP),
recent annual federal deficits have been similar to the highest
deficits of the 1930s (2 to 5 percent of GNP), but are trivial
when measured against those of the 1 940s (20 to 31 percent of
GNP). The overall national debt, now about 65 percent of GNP is
only half the size of the debt in the years immediately
following World War II.



Admittedly, any possible cause-and-effect relationship can be
argued in either direction. Wars -- the Revolution, the Civil
War, World Wars I and II -- can be said to cause deficit
spending that, while undesirable on economic grounds, is
necessary and in the national interest. The same can be said of
the huge cost of the long Cold War, which continued for 45 years
following World War II.



Depressions can also be considered as justifications for deficit
spending; projected revenues fall short of predictions even
while the government eliminates enough services to put budgets
into balance.



Yet the record suggests that deficits never have triggered
depressions but that crusades to reduce the national debt have
always been followed by depressions.



MYTHS AS MANTRA--Politicians and economists, dedicated to
prevailing myths whatever their partisan or ideological
differences, make a variety of dubious and inconsistent claims
about why we must rush to balance the budget in seven years --
or ten-and reduce the national debt at such devastating social
costs.



Claim 1: We should relieve our children and grandchildren of the
crushing burden of debt.



This suggests that the altruistic will lift great sacrifices
from the backs of our descendants. The claim has the unusual,
even unpatriotic, effect of appearing to characterize the U.S.
victories in World War It and in the Cold War as tragic mistakes
that now threaten future generations.



Obviously, the "crushing burden" could have been avoided by not
responding to the attack on Pearl Harbor and by ignoring the
post-World War II challenge of the Soviet Union. One might ask:
Where were all of today's obsessed budget-balancers when we
needed them?



The Concord Coalition, with former Senators Warren Rudman (R-NH)
and Paul Tsongas (D-MA) as its designated cheerleaders, puts
considerable effort into mobilizing young people in an all-out
assault on the cost of Social Security, Medicare and other
"entitlements."



The assault is attractive to many young people, especially those
whose wages and purchasing power have been declining for two
decades. But if these young people find themselves saddled with
the requirement to keep their aging parents alive and healthy,
they will be much less able to support their immediate families,
a problem that the Concord Coalition studiously avoids
discussing.



The sequence of a balanced budget followed by a depression has
had unhappy consequences for young people. So many Americans
were underfed and unhealthy in the 1 930s that physical
examination rejections of 40 to 50 percent were common when it
became time to build an army of draftees in World War II. The
original postwar purpose of school lunches was to keep kids
healthy enough to pass military draft requirements if that
became necessary.



Social Security, Medicare and Medicaid are devices that keep the
elderly and poor healthy. Social Security was also designed in
part to remove the elderly from a labor market that could not
hire them in the 1930s.



Economists often compare federal deficits and debt with
"'imprudent" individual spending habits. They seem unfamiliar
with the fact that many solid individuals buy homes priced at
300 to 400 percent of their annual incomes, a rough equivalent
of an individual GNP. By this logic, a national debt of double
or even quadruple the current amount should be no problem at all.



Claim 2: A balanced budget would reduce interest rates,
encourage borrowing for investment in new plants and equipment
to produce consumer goods, and increase productivity and wages.



This collection of pies-in-the-sky rests upon overlapping and
contradictory premises and an apparently deliberate avoidance of
public policies that are calculated to get in the way.



When they are not engaging in rationalizations, economists
acknowledge that the Federal Reserve Board has considerable
control over interest rates, and that some of its interest rate
decisions are explicitly intended to slow down economic growth,
create fewer jobs and depress wages in order to control
inflation. The White House, Congress and the Federal Reserve
have agreed on such policies for two decades, so it is nonsense
to claim that there is widespread interest in raising wages.



This policy has led to a comic opera surrounding the issue of
welfare reform. The bipartisan public policy is to maintain an
unemployment rate of somewhere around 6 percent in order to curb
inflation. That has been about the actual rate for a year or so.
But the unemployed are blamed for being jobless and on welfare
even though they are unknowingly performing the patriotic duty
that public policy has assigned to them. They are performing the
job of not working.



Claim 3: Government deficits and overspending cause inflation.
Public borrowing and spending are wasteful and damaging because
they do not produce goods that will be sold in the marketplace.



A publicly financed bridge is considered "wasteful" because it
has no market value. According to official wisdom, this is not
an investment. A privately financed brewery is "wealth" because
it is considered to be worth at least the cost of building it.
But this ignores the likelihood that the bridge may be necessary
for the operation of the brewery. Officially only the brewery is
an investment



Why is it that deficit spending and increases in the national
debt are widely considered legitimate only in connection with
wars? Is this the only public purpose that justifies such
spending? Isn't it possible that other needs of society might be
similarly legitimate?



The unemployment rates of young people range from 20 to 40
percent. How can we expect them to become model citizens when
not enough legitimate jobs are available or when the jobs they
can find keep them in minimum wage poverty? The policy of
compulsory unemployment creates criminals that we must then
warehouse in prisons.



At this point the needs of society are for more public goods,
financed by public spending. Why are we determined to begin
again the sequence of disaster without examining history?