The Need for a Budget Deficit
- From: William F Hummel <wfhummel@xxxxxxxxxxx>
- Date: Thu, 13 Oct 2005 11:46:12 -0700
The following article, was written by the Nobel Laureate William
Vickrey and published August 6, 1993:
We Need a Bigger Budget "Deficit"
We are not going to get out of the economic doldrums as long as we
continue to be obsessed with the unreasoned ideological goal of
reducing the so-called deficit.
The So-Called Budget "Deficit"
The "deficit" is not an economic sin but an economic necessity. Its
most important function is to be the means whereby purchasing power
not spent on consumption, nor recycled into income by the private
creation of net capital, is recycled into purchasing power by
government borrowing and spending. Purchasing power not so recycled
becomes non-purchase, non-sales, non-production, and unemployment.
A Private Capital Approach to Full Employment
We have not had a satisfactory approach to full employment, except in
wartime, since 1926. Over much of this century trends in the ratio of
profitable private capital to national product have been downward, as
a result of capital saving innovation such as fiber optics, the trend
to light industry away from steel mills and other heavy industry, and
the increasing importance of services. Prospects are that for the
foreseeable future the capacity of private industry to find profitable
use for private capital will be not much greater than two years of
gross domestic product.
On the other hand aspirations of individuals to acquire assets to
provide for retirement and other purposes have been growing, due to
longer life expectancy, higher retirement aspiration levels, the
loosening of family ties, the development of expensive medical
technologies, and other factors. Current aspirations appear to be
moving towards three years or more of gross domestic product. This
leaves a gap to be filled by government debt of about one year of
gross domestic product.
Government Debt to Fill the Gap the Private Sector Cannot Fill
If we aspire to a satisfactory level of full employment by 1998,
whereby anyone not too finicky about the type of work could find a job
at a living wage within 48 hours, this will, if we assume inflation to
average about 3%, call for a gross domestic product of about 10
trillion dollars. To fill the gap between the asset aspirations of
individuals at this level of income and the ability of the private
sector to provide assets, the supply of government securities would
have to rise to 10 trillion dollars, implying a level of income
recycling by governments of about one trillion a year on the average
over the next five years.
Paying for the Debt that Fills the Gap
Once this level is reached, to continue in equilibrium the supply of
government securities will need to grow pari passu with the gross
domestic product, to correspond to the gap between the demand of the
population for assets and the provision of assets by the private
sector. Whatever interest charges on the debt are not financed out
of this growth in the debt can more than be met out of savings in
unemployment insurance payments, and the increased tax revenues
derived from the larger national product at rates no greater than at
present. A 10 trillion debt with a full employment economy will be
far easier to deal with than a 5 trillion debt with an economy in the
doldrums.
What if the Gap is Not Filled?
If governments fail to fill the gap and meet the demand for assets by
issuing an adequate volume of securities, the attempt by individuals
to acquire assets by non-spending will cause a reduction in sales,
temporary investment in excess inventories, cutbacks in orders,
unemployment, and reduced national income and product. This may be
partially offset by the bidding up of asset values, leading to a
certain amount of additional spending out of capital gains, but the
"saving" imbedded in these capital gains does not involve the creation
of new capital or the employment of individuals in construction.
The reduction in interest rates could in principle increase
"deepening" types of investment in labor-saving technology, but after
the initial stimulus the effect on employment tends to be negative.
Little "widening" investment is likely to take place regardless of
reduced interest rates if the market for the product is not there.
There is a serious danger that the bidding up of asset prices could
create a bubble of unsustainable values that is likely to collapse
disastrously, as occurred in 1929 after the budget surpluses of the
preceding years. Sooner or later a reduction in production and
national income will set in until the reduction in income reduces the
demand for assets to conform to the supply.
Tangible Real Effects
Reducing the "deficit" may reduce the debt of the government, but it
also reduces the supply of assets people want to acquire to take care
of their security needs. Reducing the "deficit" does not improve the
real heritage left for the future, rather it impairs that heritage by
leaving a legacy of inexperienced workers, impaired infrastructure,
and reduced investment in plants because of reduced demand for the
products, to say nothing of the impact of unemployment on health,
delinquency, crime, and broken homes.
The "deficit" is not even calculated on a businesslike basis. It
makes no distinction between current account and capital account
items. If GM, AT&T, and the nation's households had been compelled to
"balance their budget" calculated in the way the federal budget is
calculated, we would now have many fewer automobiles, telephones, and
houses.
Individual Saving (Absent Strong Demand) is Counterproductive
Urging individuals to save more is counterproductive. Individual
saving does not mean that funds are created out of thin air to put
into savings accounts or the capital market; for most individuals
savings is non-spending which becomes the non-income and reduced
savings of the vendor. Funds are transferred from the bank account of
the vendor to the account of the saver, there is no increase in total
money in the bank, and no facilitation of investment, while reduced
market demand will actually discourage investment. Savings are
neither a prerequisite nor an inducement for investment. Rather,
non-spending by reducing market demand lowers incentives to invest.
Profitable Investment and Saving
On the other hand if a businessman can show good prospects for
profitable investment he can nearly always get credit and proceed with
the investment, which will constitute an increase in someone's wealth
which is ipso facto savings. Supply does not create its own demand as
soon as some of the income generated is saved, but investment does
create its own savings, and more.
Inflation and Full Employment
Eventually, in all likelihood, we will have to find some way of
dealing with the threat of an unacceptably high rate of inflation that
does not involve the maintenance of what Marxists used to call "the
reserve army of the unemployed." For the moment, however, that threat
seems sufficiently remote that we could proceed with the first steps
towards full employment and deal with that bridge when we come to it.
There has been no dearth of plans for controlling inflation in ways
that preserve the essence of free markets.
We Have the Resources but Don't Use Them
The administration is trying to bring the Titanic into harbor with a
canoe paddle, while Congress is arguing over whether to use an oar or
a paddle, and the Perot's and budget balancers seem eager to lash the
helm hard-a-starboard towards the iceberg. Some of the argument seems
to be over which foot is the better one to shoot ourselves in. We have
the resources in terms of idle manpower and idle plants to do so much,
while the preachers of austerity, most of whom are in little danger of
themselves suffering any serious consequences, keep telling us to
tighten our belts and refrain from using the resources that lie idle
all around us.
Alexander Hamilton and William Jennings Bryan
Alexander Hamilton once wrote "A national debt, if it be not
excessive, would be for us a national treasure." William Jennings
Bryan used to declaim, "You shall not crucify mankind upon a cross of
gold." Today's cross is not made of gold, but is concocted of a web
of obfuscatory financial rectitude from which human values have been
expunged.
.
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