Is deficit spending overrated?

Tuesday, 12 October 2010 05:28

Written by Marvin Bionat

It is interesting to note how fiscal positions seem to swing like a pendulum. During the Great Depression and after World War II, liberals were open to deficit spending as a way to cover the gap between the cost of social spending and limited government revenues. Conservatives, at that time, were the tightwads who warned of the grave danger of runaway spending.

When Reagan came to power, the positions switched. The Republican supply-siders conceded that cutting taxes, which mainly benefited the rich, and a spike in military spending would create an enormous deficit, but they argued that the economic benefits of the former would ultimately justify any short-term budgetary shortfalls. Liberals, at that time, became the new tightwads who harangued the GOP for fiscal irresponsibility.

Now, confronted by a stalled economy, it’s back to the Democrats wanting to spend beyond America’s means. The Republicans are of course merrily seizing the adversarial role, unleashing a propaganda war against a government that they claim is mortgaging the country’s future. These are the same people who still idolize Reagan, the president who borrowed his way out of the recession in the early 80s.

I suppose when you’re out of power, it’s a lot easier to demand responsible spending. When you’re running the government, demand for finite government resources come from all directions. It becomes politically expedient to just “charge” spending. The one time the US had a budgetary surplus in recent memory was when Clinton was in office, but that was at the height of the Internet bubble. Arguably, he got lucky.

So what’s so bad about deficit spending that it has become the proverbial kitchen sink being thrown at the party in power?

If you ask Nobel laureate Paul Krugman, it’s probably not a big deal. Between 1981 (the last fiscal year before Reagan’s presidency) and 1992, the federal deficit went up from 2.7% of the GDP to 4.9% or a 2.2 percentage point increase. How much poorer were Americans as a result of Reagan’s profligate deficit spending? Krugman, in Peddling Prosperity, wrote: “Suppose that the US government had balanced its budget from 1980 until (1992). At the end of fiscal 1981, federal debt was $994 billion, while by the end of fiscal 1992, it was $4.004 trillion. So if the budget had been balanced, the federal government would have borrowed about $3 trillion less than it did. That $3 trillion, which amounts to half of one year’s output, could have been productively invested, and that productive investment would have made us richer … But how much richer?”

The answer is by 3%, which is certainly nothing to scoff at, but considering all the brouhaha surrounding the potential scourge of government borrowing in the 1980s, leaving Americans 3% poorer does not live up to the artery-busting intensity of the rhetoric against deficit spending.

That, and probably because he doesn’t have to directly deal with Republicans who now conveniently espouse a vociferous anti-deficit stance, has led Krugman to strongly propose doubling the stimulus spending to $2 trillion. It might be what America needs, but partisan American politics will probably make it too much to ask.

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