If I were ever inclined to feel sympathy for any politicians, it would be for the venerable conservative Republicans in Congress, who all their lives voted against any increase in the government debt limit. Then President Reagan, in one of the first acts of his "free market" administration, called upon Congress to vote another whopping boost in the debt limit, this time to over $1 trillion. With tears in their eyes, a host of conservative Republicans voted, for the first time, for such an increase. They did so, they explained, because now, at long last, there was a conservative Republican in the White House, and he had pledged a balanced budget by 1984.
Well, it is now a year into the Reagan administration, and that pledge has already been brutally violated. The prediction of a balanced budget by 1984 has been officially abandoned, and the September projection of a $43-billion deficit in 1982 has also been tossed cavalierly into the dustbin of history. The latest administration forecasts are for an enormous $109-billion deficit in 1982—by far the largest in American history—to be succeeded by even more whopping deficits of $152 billion in 1983 and $162 billion in the Orwellian year that was supposed to bring us the nirvana of a balanced budget.
At least we don't have to worry any more, though, about the conservative Republicans in Congress being embarrassed before their constituents. In the course of the famous Reagan budget victory last summer, the administration snuck in a pernicious and unheralded change in the budgetary process. From now on, Congress doesn't have to vote specifically to raise the debt limit; whatever debt limit exists is automatically negated by its regular votes on the budget. Both political parties can now heave a sigh of relief; the only losers are the American voters, consumers, and taxpayers—that is, all of us.
The administration excuse, of course, for its wildly erroneous forecasts is that they were the victim of unexpected changes in economic conditions. This is hokum on many levels.
In the first place, no intelligent observer treated with anything but contempt the original forecast of a deficit of $42–$45 billion. It was obvious that a budget highly touted as a "massive" cut but in fact a substantial increase would have to create far greater deficits.
Moreover, there are always unexpected changes; there is no way to forecast the economy accurately. So how is it that every administration, Democrat or Republican, persistently underestimates its deficits? The answer is the political process itself, which encourages administrations of any party to lie through their teeth to try to look good to the American public and then to hope, like Mr. Micawber, that "something will turn up" to bail them out. It rarely does.
The administration's panicky reaction to the bloated deficits it is foisting upon us is to abandon the veteran Republican concern for a balanced budget. The Republican economic team is a confused coalition of four groups: monetarists, supply-siders, conservative Keynesians, and old-fashioned budget balancers. But the main line is being set by the monetarists and the supply-siders, who for different reasons now counsel all of us to ignore the huge deficit; it's really not so bad, they assert (echoing liberal Keynesians of yesteryear), so we might just as well relax and enjoy it.
The supply-siders care not at all for the deficit or for the level of government spending. To them, the important consideration is to cut taxes and not increase them; tax cuts spur investment and increased productivity and will stimulate enough increased revenue to balance the budget. The supply-siders are certainly correct in calling for tax cuts, although off-the-wall in promising virtually instantaneous balanced budgets as a result. But they err gravely in failing to worry about the burden of government spending.
The monetarists, too, proclaim that deficits do not matter, so long as they are not paid for by the Federal Reserve's increasing the money supply. If they are not, then deficits are not inflationary and should not be a source of worry.
Deficits not financed by new money are indeed not inflationary, but there are two grave errors in the monetarist complacency. First, the idea that, politically, the Fed will not create new money to finance deficits of over $100 billion is simply too absurd to contemplate. Wall Street is right, and the monetarists wrong, in worrying about the Fed stepping in to finance the monstrous deficits. Second, even if the Fed abstains from inflationary financing, the deficits will exert a massive "crowding out" effect, as precious savings and capital are diverted from productive private investment to unproductive federal boondoggles. The crowding out will cripple economic growth and drive up interest rates. There is no getting around it: massive inflation or crowding out and higher interest rates or some mix of the two is inevitable given the over $100-billion deficits contemplated cheerily by the Reaganaut economists.
Unfortunately, but not surprisingly, the one group of free-market economists not consulted by President Reagan is the Austrians, despite the President's professed devotion to the works of Ludwig von Mises. The Austrian prescription: deficits do matter, and the budget should be balanced; but it should be done not and never by raising taxes but by slashing expenditures.
Where, oh where, can the budget be cut? is the general answering wail. It can and should be cut anywhere and everywhere. Even if Reagan only returned to the last full Carter budget of 1980 ($579 billion), the budget would enjoy a hefty surplus. The budget can and must be balanced, but on the backs of the bureaucrats and feeders at the government trough rather than the American people.
Murray Rothbard is a professor of economics at Polytechnic Institute of New York and the author of numerous articles and books on economics, history, and libertarianism.
This article originally appeared in print under the headline "Viewpoint: Do Deficits Matter?".