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The
Need for
a Budget
Deficit
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The following article, We
Need a Bigger Budget
"Deficit" by the Nobel
Laureate
William Vickrey** was published August 6, 1993:
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The So-Called Budget
"Deficit"
We are not going to get out of the economic doldrums as
long as we
continue to be obsessed with the unreasoned ideological goal of
reducing
the so-called deficit. The "deficit" is not an economic sin but
an economic
necessity.
Its most important function is to be the means whereby purchasing power
not spent on consumption, nor recycled into income by the private
creation
of net capital, is recycled into purchasing power by government
borrowing
and spending. Purchasing power not so recycled becomes
non-purchase,
non-sales, non-production, and unemployment.
A Private Capital Approach to
Full Employment
We have not had a satisfactory approach to full
employment, except in
wartime, since 1926. Over much of this century trends in the
ratio
of profitable private capital to national product have been downward,
as
a result of capital saving innovation such as fiber optics, the
trend
to light industry away from steel mills and other heavy industry, and
the
increasing importance of services. Prospects are that for the
foreseeable
future the capacity of private industry to find profitable use for
private
capital will be not much greater than two years of gross domestic
product.
On the other hand aspirations of individuals to acquire
assets to provide
for retirement and other purposes have been growing, due to longer life
expectancy, higher retirement aspiration levels, the loosening of
family
ties, the development of expensive medical technologies, and other
factors.
Current aspirations appear to be moving towards three years or more of
gross domestic product. This leaves a gap to be filled by
government
debt of about one year of gross domestic product.
Government Debt to Fill the Gap
the Private
Sector Cannot Fill
If we aspire to a satisfactory level of full employment
by 1998, whereby
anyone not too finicky about the type of work could find a job at a
living
wage within 48 hours, this will, if we assume inflation to average
about
3%, call for a gross domestic product of about 10 trillion
dollars.
To fill the gap between the asset aspirations of individuals at this
level
of income and the ability of the private sector to provide assets, the
supply of government securities would have to rise to 10 trillion
dollars, implying a level of income recycling by governments of about
one
trillion a year on the average over the next five years.
Paying for the Debt that Fills
the Gap
Once this level is reached, to continue in equilibrium
the supply of
government securities will need to grow pari passu with the gross
domestic
product, to correspond to the gap between the demand of the population
for assets and the provision of assets by the private
sector.
Whatever interest charges on the debt are not financed out of this
growth
in the debt can more than be met out of savings in unemployment
insurance
payments, and the increased tax revenues derived from the larger
national
product at rates no greater than at present. A 10 trillion debt
with
a full employment economy will be far easier to deal with than a 5
trillion
debt with an economy in the doldrums.
What if the Gap is Not Filled?
If governments fail to fill the gap and meet the demand
for assets by
issuing an adequate volume of securities, the attempt by individuals to
acquire assets by non-spending will cause a reduction in sales,
temporary
investment in excess inventories, cutbacks in orders, unemployment, and
reduced national income and product. This may be partially offset
by the bidding up of asset values, leading to a certain amount of
additional
spending out of capital gains, but the "saving" imbedded in these
capital
gains does not involve the creation of new capital or the employment of
individuals in construction.
The reduction in interest rates could in principle
increase "deepening"
types of investment in labor-saving technology, but after the initial
stimulus
the effect on employment tends to be negative. Little "widening"
investment is likely to take place regardless of reduced interest rates
if the market for the product is not there. There is a serious
danger
that the bidding up of asset prices could create a bubble of
unsustainable
values that is likely to collapse disastrously, as occurred in 1929
after
the budget surpluses of the preceding years. Sooner or later a
reduction
in production and national income will set in until the reduction in
income
reduces the demand for assets to conform to the supply.
Tangible Real Effects
Reducing the "deficit" may reduce the debt of the
government, but it
also reduces the supply of assets people want to acquire to take care
of
their security needs. Reducing the "deficit" does not improve the
real heritage left for the future, rather it impairs that heritage by
leaving
a legacy of inexperienced workers, impaired infrastructure, and reduced
investment in plants because of reduced demand for the products, to say
nothing of the impact of unemployment on health, delinquency, crime,
and
broken homes.
The "deficit" is not even calculated on a businesslike
basis.
It makes no distinction between current account and capital account
items.
If GM, AT&T, and the nation's households had been compelled to
"balance
their budget" calculated in the way the federal budget is calculated,
we
would now have many fewer automobiles, telephones, and houses.
Individual Saving (Absent
Strong Demand) is
Counterproductive
Urging individuals to save more is
counterproductive. Individual
saving does not mean that funds are created out of thin air to put into
savings accounts or the capital market; for most individuals savings is
non-spending which becomes the non-income and reduced savings of the
vendor.
Funds are transferred from the bank account of the vendor to the
account
of the saver, there is no increase in total money in the bank, and no
facilitation
of investment, while reduced market demand will actually discourage
investment.
Savings are neither a prerequisite nor an inducement for
investment.
Rather, non-spending by reducing market demand lowers incentives to
invest.
Profitable Investment and Saving
On the other hand if a businessman can show good
prospects for profitable
investment he can nearly always get credit and proceed with the
investment,
which will constitute an increase in someone's wealth which is ipso
facto
savings. Supply does not create its own demand as soon as some of
the income generated is saved, but investment does create its own
savings,
and more.
Inflation and Full Employment
Eventually, in all likelihood, we will have to find some
way of dealing
with the threat of an unacceptably high rate of inflation that does not
involve the maintenance of what Marxists used to call "the reserve army
of the unemployed." For the moment, however, that threat seems
sufficiently
remote that we could proceed with the first steps towards full
employment
and deal with that bridge when we come to it. There has been no
dearth
of plans for controlling inflation in ways that preserve the essence of
free markets.
We Have the Resources but Don't
Use Them
The administration is trying to bring the Titanic into
harbor with a
canoe paddle, while Congress is arguing over whether to use an oar or a
paddle, and the Perot's and budget balancers seem eager to lash the
helm
hard-a-starboard towards the iceberg. Some of the argument seems
to be over which foot is the better one to shoot ourselves in. We have
the resources in terms of idle manpower and idle plants to do so much,
while the preachers of austerity, most of whom are in little danger of
themselves suffering any serious consequences, keep telling us to
tighten
our belts and refrain from using the resources that lay idle all around
us.
Alexander Hamilton and William
Jennings Bryan
Alexander Hamilton once wrote "A national debt, if it be
not excessive,
would be for us a national treasure." William Jennings Bryan used to
declaim,
"You shall not crucify mankind upon a cross of gold." Today's
cross
is not made of gold, but is concocted of a web of obfuscatory financial
rectitude from which human values have been expunged.
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**William Vickrey, one of America's
most respected
economists, received the Nobel Prize for economics in 1996. Sadly
he died of a heart attack at the age of 82, just 3 days after the
announcement.
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