Introduction
Today’s New York Times highlighted the canonization of federal deficits. For the first 75 years of my life, I learned repeatedly that government deficits should be a source of fiscal concern. Today there appears to be no limit on expenditures. In fact, anyone that questions expenditures is a reincarnation of Scrooge.
It is widely recognized that our economic problems of the 1970’s were attributable to not paying for the Vietnam War. Sadly, I can still remember the awful decade of the 1970’s when America suffered both from inflation and high unemployment. Until Paul Volcker became Chairman of the Federal Reserve and ratcheted overnight rates above 20% did we break the back of inflation. I therefore find it incredible that critics of massive deficits have limited access to either our news media or television.
Instead of reproaching unlimited deficits, a legion of economists and Federal Reserve officials who formerly urged deficit reduction are now urging Congress and President Trump to continue spending trillions of dollars to prevent a long-term collapse in business activity and prolonged joblessness. In fear of being accused of stealing the punch bowl, nobody even mentions that local, state, and the Federal government might need to increase taxes in future years to reduce their deficits.
Behind those calls is a confluence of events that have enhanced the economic case for rising deficits — a combination of rock-bottom interest rates, falling consumer prices and a deep plunge in consumer and business activity.
Many economists said in the past that large public deficits and debt would bog down the economy, by pushing up borrowing costs for businesses and sending consumer prices soaring. Now, the Federal Reserve has made clear that low interest rates, which have been slashed to near zero, are here to stay, making it cheaper for the United States to borrow money. Inflation, which struggled to get out of the gate during an 11-year expansion, seems confined to the woodshed.
While it is true that the Federal Reserve can control short-term interest rates, they cannot control long-term rates indefinitely.
In order for America to survive the recession and minimize the damage, many economists are now urging lawmakers to spend more. They want additional aid to small businesses, continued enhanced unemployment benefits for workers and more assistance for state and local governments that have seen a steep falloff in tax revenue and have already laid off 1 million workers. Such spending, economists argue, would hasten a rebound in economic growth and help save businesses that might otherwise fail, generating a return to the economy that exceeds the relatively low future interest costs incurred by prolific borrowing.
To counter the above argument I can point to flagrant government excesses in other countries– Weimar Germany, Argentina, Zimbabwe– that led to currencies that had no value. Of course with unemployment above 20% and dampened consumer demand, we have very low inflation. And this too shall pass!
Ken Rogoff, a Harvard University economist whose work on government debt and economic growth was frequently cited by lawmakers in pushing for deficit reduction has pretty much stayed on the sidelines. He only commented that “we are in the early innings.”
On a bi-partisan basis, both parties are resisting any efforts to reign in deficit spending. The Democrats are pushing for another $3 trillion dollar stimulus. The Republicans are calling for further tax cuts.
Possibly the greatest proponent of Alice and Wonderland thinking is Stephanie Kelton, an economist who advised Senator Bernie Sanders. She champions a theory that the federal government’s spending levels should be limited not by tax collections or debt levels, but by how much the economy can actually produce. To be kind, her words are a “meaningless abstraction.” That is, they cannot possibly be a recipe for sane economic policy.
Polls show that Americans worry about the nation’s deficits and debt, but those worries have declined in recent years.
When I first came to Wall Street, the U.S. treasury could only issue debt maturing within 7 years because of fears that the Federal Government would crowd out private borrowers. Currently, those worries are not valid.
Michael Boskin, a Stanford University economist said, “at some point future generations are going to be paying for this.” However, he is a voice in the wilderness.
The Congressional Budget Office projects that the deficit will hit $3.7 trillion this fiscal year. I expect the deficit to be at least $2 trillion the following fiscal year. Can we continue to incur such deficits without undermining our future ability to respond to future economic crises?
Originally published in the Sarasota Herald-Tribune
