Selected Skirmishes: Deficit Dance


Hi. I'm the Federal Government, and am an overspender. I can't get within $400 billion of balancing my checkbook. I acknowledge that I have a problem and I need serious help.

In a sense, this is what the Democratic House members now hawking a balanced-budget amendment are saying: Stop me before I deficit spend again. Clever move. Like the boozer who invited family and friends to the A. A. meeting, BYOB. The inside word is that the rascals are hoping a constitutional amendment will actually force taxes up.

While everyone seems to agree that the Democratic Party is clueless and desperate (including their own 1992 presidential standard-bearer, who is careful to tell voters he only puts the D after his name because it's a rule), it has performed the most outstanding public-policy reversal of this whole generation. As recently as the late 1970s (the last time they had even a malaiseful grip on executive power in these United States), the Democrats were mesmerized by the Joy of Deficits with virtually transcendental conviction.

Their church affiliation was Keynesian, and its Holy Grail was the fiscal magic of deficit budgets. Deficits would sweep unused resources into productive enterprise and bulk up the GNP. "Deficit financing" was commonly used in sentences ending with "priming the fiscal pump" or "jump-starting the economic engine" in both Democratic platforms and Econ 2 exams. (Yes, due to a loophole in the ban against teaching religion in the public schools, they blessed us with this article of faith in the textbooks of the 1950s, '60s, and '70s.)

It was only when Ronald Reagan embraced the theory that deficits acquired a suspicious reputation. This is all very humorous historically, because fashionable liberal opinion absolutely vilified as reactionary ideologues those who worried about deficits.

It was not always so. The Nobel laureate James Buchanan believes that the Keynesian revolution in economic theory dramatically changed a deep social aversion to government deficits. The conversion to the "new economics" took place during the New Deal, and it was not driven by intellectual discovery. Indeed, when the colorful John Maynard Keynes came to the USA to explain to President Franklin Roosevelt his cutting-edge model determining deficits to be sound economic pick-me-ups, Roosevelt remarked that he hadn't understood a word spoken by the professor—but that he thought his government was already doing it. And so they were: While surplus budgets had previously been the order of the day, we have had exactly six surplus budgets since 1933 (three under Truman, three under Eisenhower).

Prior to the New Deal, posits Buchanan, politicians who ran up deficits were assumed to be scoundrels. Profligate cads playing fast and loose with the public purse, in fact. But then Dr. Keynes crafted a new science. In the throes of the Great Depression, his new fiscal clinic set up shop to dispense political therapy: Spend lots, tax less—the deficits will pay for themselves. The policy makers, straining so as not to be too eager, obliged. (About as reluctant to swallow this new medicine as you'd be if your physician, diagnosing you as "stressed out," prescribed six months at the Cancun Club Med, billable to Blue Shield.)

So complete was the spiritual conversion of both Bubba and the professors that balanced budgets became scroogelike policy pleasures, possibly even unconstitutional ("cruel and unusual," don't ya know). Now deficits were expansionary, progressive—and good politics. (Electoral IQ Test Question: Would you rather be the president who boldly stimulated America's private sector or contracted it?)

It is no surprise that the Democrats, having forged this remarkable spinning of economic reality, are furious with GOP thievery in the 1980s. (Note that the only upper-income group to suffer in Reagan's America, it seems, are Democratic Party functionaries.) The supply-side promise, in its more popular and fantastic renditions, was no more honest than had been the Keynesian. Feel-good pols such as Jack Kemp boldly asserted that tax-rate reductions would alone provide for both private and public prosperity. If true, who could object to cutting taxes to zero?

But. alas: The real level of taxation is what the government spends. Every dollar must be disgorged from a real, live American taxpayer now or (with interest) in the future. And that tax burden, whenever it falls due, is a disincentive to wealth accumulation today. When, after just six months, David Stockman flamed out attempting to cut giveaways to Republican interest groups (defense contractors, agribusiness, developers, small business, etc.), he had taken the one honest stab the GOP was to make at cutting tax burdens for working-class Americans.

The shame is that lowering the burden of government could be done in a humane, progressive, and dynamic fashion that would greatly increase chances for civility and upward mobility in an America of the future. (Slashing some ridiculously high marginal rates for upper-income workers did, in 1981 and 1986, add revenue to the federal budget.) But in cowering from tough choices on what to cut in a federal budget dripping with pork, the beef of tax-rate reduction was almost thoroughly squandered by Kempian quackery and Republican opportunism.

Snake oil is sold from all sides of the political spectrum, as the Keynesian poseurs and the supply-side hucksters should slickly attest. But that, of course, is what our two-party system is all about.

Contributing Editor Thomas W. Hazlett teaches economics and public policy at the University of California, Davis.