That ‘Cyclical’ Budget

May 8, 1961

In his Budget Message of March 24, President Kennedy took over a doctrine that has been preached for the last 30 years by spenders and Keynesian economists and declared it to be official policy:

“Federal revenues and expenditures—the Federal budget—should, apart from any threat to national security, be in balance over the years of the business cycle—running a deficit in years of recession when revenues decline and the economy needs the stimulus of additional expenditures—and running a surplus in years of prosperity.”

A “cyclical” budget of this sort would be, in fact, an abandonment of all fiscal responsibility.

No one can predict the business cycle in advance. No one knows just when an upturn will begin, how fast or how far it will go, when it will reach its peak, when it will crack, how far it will drop. There are, of course, hundreds of statisticians and forecasters, in and out of the government, who offer to tell us or sell us this information. Some of them will make better guesses than others. But in the nature of things, at any given time only a minority of them can be right. As the European economist L. Albert Hahn recently summed up the case: “If the business cycle were predictable, there would be no cycle, as everybody would hedge against it.”

WHERE ARE WE?

No one even knows at any given time precisely where we are in a cycle. If we are in a recession, are we scraping bottom, or are we due to drop lower? If a recovery has started, will it peter out? Will it be mild? Will it be strong? If things are good, are we in a short-lived boom? Or has the country taken off on a higher rate of longtime economic growth?

Economists may, in the main, agree that a past business cycle ran so-and-so-many months or years. A present or a future business cycle, however, has no pre- determinable length and no known end. Consequently, at no point can anyone charge that an Administration has definitely failed to balance the budget even over the cyclical period. The Administration in power can always argue that things are so unsatisfactory that a continuation or increase of huge spending or deficits is necessary. No matter how high an existing boom, the Administration will always be able to point to “pockets of unemployment” here and there, or to some groups that have not done as well as others. It will still argue that this is no time to endanger everything, and bring on unemployment and deflation, by overbalancing the budget and paying off debt.

IRRESPONSIBLE PLAN

The cyclical budgeteers do not accept the logic of their own proposal. If, as they argue, it is unreasonable to expect a budget balance every year, because we cannot, say, foresee depressions and wars, then the corollary is that we should normally plan for a substantial annual surplus. If thumping deficits are necessary in the low years of the cycle, then equally thumping [surpluses] are required in the good years. But I have not heard any of those who advocated or helped bring on the $12.4 billion deficit in 1959 demanding a $12.4 billion surplus in 1962. They are urging or planning still more deficits.

So, to repeat, official adoption of the cyclical-budget doctrine would mean the complete abandonment of fiscal responsibility. No Administration could be held to account. It could always leave the balancing to its successors. Après nous le déluge!

Even without making it official, we have already had irresponsibility enough. We have had 25 budget deficits in the last 31 years.

The cyclical-budget doctrine, finally, not only promotes political irresponsibility; it is economically unsound. It got a massive tryout in the ten-year period 1931–40, and proved a massive failure. The average deficit in those ten years was 3.6 percent of the then gross national product (which would mean average annual deficits today of $18 billion). The consequence was average unemployment of 18.6 percent of the working force.

Perpetual full employment is not assured by perpetual inflation. Full employment is the result of a proper coordination of wages, costs, and prices. But this is something the Keynesians have not yet learned.