Salvation through Spending

June 12, 1950

The Truman Administration is beyond comparison the biggest peacetime spender in our history. At the height of an inflationary boom it still flounders in deficits. Yet until a few weeks ago we were told that the spending was temporary, made unavoidable by the cold war. The deficit was “inadvertent,” or the fault of the Republicans. In a speech on May 15, however, Leon H. Keyserling, the new chairman of the President’s Council of Economic Advisers, came out frankly in favor of spending for its own sake. Spending itself is so necessary, it seems, that “when the costs of the cold war can safely be reduced we should use some of that saving to expand the programs of resource development and human security.” In other words, instead of economizing or trying to reduce the burden of taxes, we should then increase other spending.

“In 1929,” says Keyserling, “Federal expenditures represented only about 3 percent of the nation’s total production of goods and services. But this did not produce a healthy economy. During the most recent three years Federal spending has averaged about 15 percent.” And this spending has “lifted our total national product” and “restored faith in the American way of life.”

This is economic nonsense. It takes the credit away from the inventors, investors, managers, and workers responsible for our economic growth and assigns it all to the bureaucrats. By itself, in fact, government spending does not add a single dollar to purchasing power. It merely changes the directions in which money is spent. When the Federal government was spending 3 percent of the nation’s income, it took only 3 percent of it away from the nation’s taxpayers. When it spends 15 percent of the national income, it must in the long run take 15 percent away from the taxpayers. The taxpayers have as much less to spend for goods and services as the bureaucrats have more.

“The test,” continues Keyserling, in his speech of May 15, “of whether Federal spending is wise or unwise is this: Is it putting people and other resources to work for purposes which are more useful to our economy as a whole than the other purposes for which this same manpower and other resources would be used if the Federal spending did not occur?”

And Keyserling’s own implied answer is that he and Mr. Truman know how to spend money more usefully and wisely than the people who actually earned it. If you permit the citizen to spend his own money on the things he himself wants, he will run the economy into the ditch. The way to save him is to take the money out of his irresponsible hands. Let the bureaucrats spend it to expand their pet “social” programs. They know what the taxpayer needs better than he does himself.

Government can increase monetary purchasing power, not by spending per se, but only by deficit financing and by printing money and expanding credit. In short, by inflation. And the Federal government is now inflating by every direct or indirect means: by increasing its deficit, forcing down interest rates, supporting government bonds, increasing government loans for farm price supports, for housing, for small business, for big business, for artificial exports, and by political loans to every “democratic” foreign government from Tito’s Yugoslavia to Perón’s Argentina.

Inflation is always politically popular in the early stages. It raises prices, increases profit margins, promotes “full employment,” expands incomes, wages and profits in terms of dollars, and makes everyone feel richer. The present inflationary boom can doubtless be kept going for a long time yet. But the bigger and longer such a boom, the bigger and more certain, other things equal, the eventual bust.

One of the chief ironies of the present situation is that the very people who have been most derisive about a “boom-bust economy” are the ones now most zealous in whipping up the present inflationary boom to ever new and dizzier peaks.