Deficits are not the Only Problem; B. Anderson

How, an astute observer of our po litical economy might ask, can the Federal deficit have fallen into such disrepute, especially among its one time supporters? Did not Keynesian economists tell us in triumphant Mr. Anderson is a teacher of social studies at Ross ville, Georgia, Junior High School. He is the 1982win ner of the Olive W. Garvey essay contest on "The Virtues of the Free Economy" involving a fellowship to the general meeting of The Mont Pelerin Society. Bill Anderson DEFIICITS ARE NOT THE ONLY PROBLEM words that the i so-called capitalist problems of boom and bust were to be solved by government fiscal pol icy of which thel deficit was an inte gral part?2 Consider one l economist's claim that the 1964 F1ederal deficit was a "desirable" element of the nation's economy. The basic explanation for our achieve ment (a prosperotls economy), I think, is that, in 1964, our politicians finally "grew up" into mid-20th century fiscal policy thinking. As a result, there was nothing less than a revolution in economicthought at the highest poli~ymaking levels of our government.

In the past, oUr politicians have al ways considered it imperative to hail an annually balancep budget as economic purity, to condemn a budget deficit as fis cal sin, and to sh~nk from tax reduction in the face of budget deficits as unspeak ably reckless. Bujt in 1964, the federal budget deficit waS accepted as actually 588 THE FREEMAN October desirable because this meant the federal government was pouring funds into the economic stream, and this money would help lift us to levels of full employment and full use of our great industrial ca pacity.3 One is hard pressed today to find a description of the present Federal deficit made in such hushed, rever ent tones.' But, then, the numbers have changed as well. In 1964, the Federal deficit to which Ms. Porter attributes such sterling results as "full employment" and "full use of our industrial capacity" was $5.9 billion, or roughly five per cent of the total budget. 4 The proposed Fed eral deficit for the coming year (and remember, proposals usually fall way short of real spending) is about $100 billion, nearly 15 per cent of the ten tatively-approved U.S. Government budget. Even allowing for the gal loping inflation since 1964, the present numbers are clearly out of hand. The "harmless" (or helpful, depending on one's point ofview) def icits of two decades ago have grown into what seems to be an uncontrol lable monster.

The problems resulting from the size of the Federal deficit are not in dispute. For example, in 1965, when President Lyndon Johnson greatly expanded domestic Federal spend ing, the U.S. Treasury took approx imately 18 per cent of available funds from the nation's credit markets. Today that number stands at nearly 80 per cent. Funds for investment, our economy's seed corn, are being devoured at an alarming rate which can only spell out a real decrease in standards of living for most Ameri cans. Rates of inflation, though re cently somewhat diminished, have severely depreciated the dollar, caused malinvestment and brought about economic decline. The Real Issue: Spending But the real issue of the Federal budget is lost in a semantic word game which, at best, diverts people's thoughts from the main sickness that being Federal spending-to def icits, which are only a symptom of the disease. This is not to say that budget shortfalls are not dangerous.

They are. But when one simply con centrates on condemning the deficits while ignoring the dangers of gov ernment overspending, it is, to para phrase the New Testament, strain ing at a gnat and swallowing a camel. A recent editorial of a nearby ma jor metropolitan newspaper demon strates this kind of naivete. In the editorial, titled "Tax Hike or Reces sion," the writer accurately noted that the shortfalls would have to be covered either by creation of fiat money-and thereby inflation-or by Federal borrowing from hard pressed credit markets. Both "solu tions," he pointed out, would effec tively raise interest rates and limit capital expenditures.

1982 DEFICITS ARE NOT THE ONLY PROBLEM 589 His solution? Raise taxes, ofcourse. Thus, he indicated, the deficit would be eliminated in this relatively painless manner, interest rates would fall and the economy would recover. The only barrier to prosperity, he reasoned, was the lack of courage by politicians to reverse the tax cuts they had given us last year. This editorial writer has not been the only one to endorse tax increases as the way to solve the budget prob lems. Radio and television commen tators, both liberal and conservative politicians, and economists who should know better have also jumped onto this shortsighted bandwagon declaring that tax increases are the only way to prosperity. But they ig nore the fact that deficits are only a symptom. The disease is too much spending. None of the Alternatives Is Acceptable When the Federal budget is dis cussed on the news, the ultimate point of discussion is the proposed $100 billion deficit. Few commenta tors-and economists-ever discuss the gargantuan size of the Federal budget. This year Federal spending will most likely exceed $800 billion.

The officialFederal debt is more than one trillion dollars. 5 But why, one might ask, is it not better to tax in order to curb deficits than to borrow or print money? Af ter all, the perils of inflating are widely knowneiVen to the most eco nomically illiterate persons, while excessive Federal borrowing not only "crowds out" capital but also diverts money from prqductive uses to non productive ones!. The answer is that none of these 'i'alternatives" is ac ceptable. While past budget deficits were often run deliberately in order, as Ms. Porter writ~s, to pour "funds into the economic st~eam," there is plenty of historical evidence to show that governments inflate even when their budgets are offi~ially balanced. Dur ing the 1920s, as Economist Murray Rothbard has Ijloted, the U.S. Gov ernment raisedlthe money supply by nearly 62 per cent in the face ofbal anced Federal budgets. 6 From 1977 to 1980, the nation of Colombia suf fered an annual increase in inflation of more than 25 per cent, despite the fact that its talK revenues exceeded government ~xpenditures.7 The problem here is not deficit spending, but rather government monopoly over the supply of trz,oney. Governments may use deficits as an excuse to print money, but wij.en government con trols the "cre8ition" of money, any reason will do. I Nor vlould i increased taxation eliminate gov~rnment borrowing, either at localjor Federal levels. As long as governments continue to in volve themsel~es in enterprises be yond protectio:p' of citizens' life and property, there will always be dams 590 THE FREEMAN October to build, school buildings to erect, canals to dig and individuals to sup port. Such multi-million (and bil lion) dollar ventures require vast sums of capital which can only be borrowed. 8 Thus, deficit or no deficit, governments will continue to suck capital from private markets in or der to fund projects that could be handled more efficiently and with less expense by the private sector.

One is left, then, with the ques tion of taxation. The issue is not, as many "born-again budget balan cers" have declared, choosing "less painful" taxation above borrowing or inflation. Increasing taxes to bal ance a budget is not a panacea for our economic ills, as many would tell us. Consider economist Alan Rey nolds' warning. In the depths of the Great Depression, Wall Street and the financial editors agreed that restoration of confidence re quired a balanced budget. In 1932, the Hoover administration complied by sign ing the biggest percentage increase in tax rates in peacetime history. Needless to say, that did not strengthen the econ omy, calm financial markets or balance the budget. 9 UnseenConsequences People are often shortsighted on the evils of heavy taxation. They can see the credit markets being drained of capital by the government. They can see the leap in prices as inflation takes hold on the economy. But taxes go beyond their visual effects. One can see public treasuries fill up with tax revenues. What is not seen, how ever, is the loss of funds that might have gone into capital markets, the loss ofpotential investments, the real loss of income for individuals who pay huge portions of their earned in come to government. Money that might have been invested in profit able, wealth-creating projects is used, instead, for government consump tion. To increase the level of taxa tion would not enhance investment opportunities. Indeed, to confiscate revenue through taxation is no bet ter than to devour it straight from the markets or to print it on the printing presses at the Bureau of Printing and Engraving. The dam age done to the economy will not be lessened by choosing taxation over borrowing or printing.

Heavy taxation also encourages people to take their income from productive investments-which of ten fall in the reach of the Internal Revenue Service-and place them in less productive tax shelters. Again, this problem is an invisible one, since people cannot see· the factory that was not built, the invention that was not marketed or the entrepreneur's dream that was unfulfilled. No doubt, as Reynolds writes, the Federal budget, all $800 billion of it, could be balanced as "a matter of sheer bookkeeping."lo He points out: ... we could probably balance the U.S. budget by disarming, or by doubling the 1982 DEFICITS ARE NOT THE ONLY PROBLEM 591 corporate tax, or by confiscating all in come above $50,000 a year. In practice, any of these options would probably de stroy the country. 11 InterventionBringsStagnation Economic stagnation is not the price of "curing deficits." Rather, it is the price the people of a' nation must pay when its federal govern ment spends far more than its citi zens can afford, taking from Peter to give to both Paul and Peter-minus a hefty commission.

This is not to say that budget def icits are not a problem. They are. But the issue at hand in discussing deficits is not just bookkeeping, but also ignorance and arrogance. Since the 1930s economists have promised that budget deficits will permit pol iticians to circulate new money into the economy, thereby "spreading the wealth," and politicians have ea gerly obeyed. But, as a decade of runaway inflation has demonstrated beyond a doubt, dumping fiat money into an economy creates only the il lusion of wealth, not wealth itself. Since deficits became a staple of government fiscal policy, people have deceived themselves into believing that increased prosperity, the rise in real income, and a rising standard of living were due to their politi cians' spending more than was taken in taxes. But as deficits have widened and seemingly run out of control, it has been equally de~eptive for people to believe that prosperity will return as soon as the books are balanced.

Prosperity will! return only when citizens stop dehtanding their gov ernments give them a standard of living that the~ cannot themselves produce, as indhtiduals acting within the free market~ ® -FOOTNOTESISylvia Porter, "Fqcus on the Economy," The World Book Year Book, 1965, p. 27. 2Austrian economists, particularly von Mises and Rothbard, have iconclusively demonstrated that government mopetary policy is usually the cause of boom and bpst cycles. It can hardly be expected, then, that erratic fiscal policies can somehow solve the vrery problems they create. 3Porter, p. 27. 4Source: Statisticp,l Abstract of the United States, 1980. The f~deral budget in 1964 was approximately $118ibillion. 5Economic writers such as Irwin Schiff and others have estimat~d that the liabilities of the Federal governmen~ are up to 10 times greater than the officially-apmitted debt. 6Murray Rothbar~, America's Great Depres sion (Kansas City, ~963), p. 86.

7Alan Reynolds, 'fThat Budget Deficit Is Not the Problem," WalliStreet Journal, October 5, 1981, p. 28. 8Contrary to what some may believe, govern ments usually pay for public projects with bor rowed money. The payments are paid back with tax revenues (except in the case of New York City in 1975, whic1jJ. paid back borrowed funds with more borrowe<ilfunds). 9Reynolds, p. 28.. lOIbid. I1lbid.