Michael Johns in 1996 on Balanced Federal Government Budgets
This was written by Michael Johns. I saw him on C-Span, contacted him, and have been in touch ever since. Michael is a conservative, and one of the Tea Party founders. As you can see below, however, he too recognized the very wrong and counter agenda turn taken by the Republicans (and then the Tea Party) when they embraced deficit reduction and the balanced budget amendment for its own sake. He wrote this most prescient article in 1996 if I recall correctly, which was published in the Washington Post:
A Balanced Budget Is Not the Answer
by Michael Johns
In its political toughness with the Clinton White House in recent months, the Republican leadership in Congress has elevated balanced-budget proposals to the top of America’s political agenda. Although at least nominal political differences exist over the means to arrive at this objective, the embrace of a seven-year balanced-budget goal by both Republican congressional leaders and President Clinton represents the most significant shift in the economic thinking of the political elite in perhaps two decades. The concept of balanced budgets has long existed as a weapon in mainstream political rhetoric, but only since the 1994 elections has this rhetoric run the significant possibility of becoming political reality.
Yet before such a goal is uniformly embraced and enacted as policy, Congress and Clinton should pause to reflect on whether such an objective deserves its place at the pinnacle of our economic objectives. Upon such reflection, there is good reason to believe that it does not.
There is, for instance, no historical data that would demonstrate that a balanced budget enhances gross domestic product (GDP) or any other indicator of economic productivity. Balanced budget advocates have long contended that the absence of a balanced budget opens the door to a “crowding-out effect? on interest rates, whereby government borrowing actually closes out private borrowing, thus raising interest rates on private credit and slowing the economy. Contrary to this, however, some of the most profound drops in interest rates and expansions in economic growth have occurred at moments when the deficit has been on the rise (witness, for instance, the interest-rate drop and economic growth that largely characterized the eight-year Reagan administration period).
Nor is there any particular evidence demonstrating that our current budget deficit is necessarily at the root of any particular economic problem that a balanced budget would correct. True, the balanced budget is a convenient political means for cutting the substantial waste and even fraud that exists in federal expenditures, but there is no reason to believe that this could not be accomplished short of wedding our nation’s policy leaders to a squarely balanced budget in every fiscal year.
BALANCED BUDGETS BEHIND DEPRESSIONS
Perhaps most convincingly, America does have some previous experience with balanced-budget efforts, and it is cause not for celebration but considerable alarm. Without exception, on six consecutive occasions from 1817 until 1930 when government cut spending considerably without simultaneously seeking to stimulate the economy with equally deep tax cuts or other fiscal stimuli, depressions arose. The correlation is a shocking 100 percent. Balanced-budget efforts in America have always preceded national depressions.
So why are we doing this? It is reasonably apparent, on close examination, that the balanced-budget debate, rather than seeking the advancement of any specific macroeconomic goal is more a convenient means by advocates for accomplishing other political objectives that otherwise might be less sellable. On one hand, for instance, many congressional Republicans see the balanced budget as a political vehicle for enacting sweeping cuts in federal spending that, without the political cover of a balanced budget, likely would be significantly more difficult to sell to the American people.
On the other hand, many Democrats, including President Clinton, appear to see the balanced budget as a far-off and thus somewhat meaningless objective; even if Clinton were reelected, the current proposals would not force him to balance even one budget in a second term. Perhaps because of this, he has seen little imperative in resisting the plan. In January, one senior Clinton aide conceded that the administration’s endorsement of a balanced budget was just “a public relations game.”
Also not considered by many Republicans is the fact that some Democrats may even see the balanced budget as a means for providing political cover for eventually increasing the tax burden on the American people, even though such fiscal steps have been universally discredited over the past two decades. Nonetheless, if maintaining balance in the federal budget is the nation’s top economic priority, the balanced budget could likely be used over time to justify enhancing federal revenue through larger tax demands on both private citizens and businesses. Short of this, congressional Democrats will almost certainly use the balanced-budget restrictions as justification for resisting any Republican-sponsored tax cuts.
For Republicans and fiscal conservatives, this raises the question of whether the political cover for spending cuts that accompanies a balanced budget is worth the risk of providing Democrats and fiscal liberals with the same level of future political cover for raising taxes. The answer is that it most probably is not.
Of course, the political sentiments that have advanced the balanced budget cannot be thrown aside. Congressional conservatives are largely correct in their bid to eradicate wasteful government spending and to transfer from the public sector to the private sector those responsibilities that would more appropriately be handled outside of government. Yet cutting wasteful spending does not necessarily require embracing a balanced budget. Under a fiscally conservative president, such steps could be taken through enacting a line- item veto. Short of this, Congress could use the widespread support for smaller government to cut spending and taxes simultaneously, without operating on the premise that a precise budget balance is necessarily the most pressing priority.
Perhaps the most compelling reason to resist a balanced budget, however, is the fact that, politics aside, there simply is no reason to believe that a balanced budget will provide any economic stimulus to the economy, and there are at least a few reasons to suspect that it may do great harm. In addition to the absence of any historical data in the United States or elsewhere in the world that demonstrate any connection between balanced budgets and sustained economic growth, there is no reason to believe that America’s budget deficit is necessarily at the root of any current macroeconomic dilemmas. A comparison of budget deficits as a percentage of GDPs reveals that Americas budget deficit is reasonable, even low, compared with that of other industrial nations.
DEFICIT REDUCTION MEANS ECONOMIC DOWNTURNS
Additionally, a close look at the relationship between deficits and economic growth in countries around the world reveals that deficit-reduction measures are often followed by downturns in economic growth. Conversely, increases in deficits often accompany economic upturns. In Great Britain, for instance, a reduction in debt from 1989 to 1991 from roughly 44 percent of GDP to 34 percent also witnessed a reduction in GDP during this period from O percent to negative 4 percent. Since 1991, Britain’s public debt has increased to roughly 52 percent of GDP, and economic growth also has risen dramatically to 5 percent GDP in 1995. What such examples demonstrate is that, contrary to the conventional wisdom of balanced budget advocates, there simply is no reason to believe that a balanced budget will enhance economic growth or prosperity, and there is, in fact, good reason to believe that it may do harm.
All of this raises the question of whether congressional Republicans, in their emphatic embrace of balanced budgets, may now be playing the wrong political card with the Clinton White House. Instead of elevating the balanced budget to the top of the Republican agenda, why not more aggressively challenge Clinton to cut or eliminate the federal tax on capital gains or reduce the marginal rates of federal taxes, two steps that almost unquestionably would spur economic growth?
Of course, congressional Republicans, particularly many freshmen, support such goals enthusiastically. But perhaps surprisingly, the Republican leadership in Congress has not chosen any of these as the primary issue of confrontation with President Clinton; instead they have chosen the balanced budget, even though the president has at least verbally endorsed such an objective.
Responding to this criticism from House Republican freshmen. House Speaker Newt Gingrich has made it clear that the objective of a balanced budget surpasses any other progrowth initiatives. “They have two highly competitive desires: to balance the budget and a tax cut,” Gingrich was quoted as saying about Republican freshmen in January. “At some point, you’ve got to say, ‘O.K., which has precedence?’ And I think in the end, balancing the budget does.”
But just as relevant as the politics that drives the balanced-budget crusade is the fact that, while politically and rhetorically advantageous at the moment, the case for elevating a balanced budget to the top of our economic priorities is also based on a significant oversight or distortion of several critical historical economic facts.
The 100 percent correlation between previous balanced-budget efforts and national depressions, for starters, needs to be explored further by those who would again lead America down this path. It is likely not coincidental, either, that another, opposite correlation also exists. Periods of significant and sustained economic growth in this country have occurred nearly always in times when the deficit was on the rise.
ADJUST ECONOMIC THINKING
Why might this be the case? Warren Mosler, the director of economic analysis at the investment firm Adams, Viner, and Mosler, offers up a possible answer in his book Soft Currency Economics. According to Mosler, American policymakers have not yet adjusted their thinking about monetary and fiscal policy to a post-gold-standard era.
In this new era, the common notion that government requires private money to pursue its spending is no longer true. Under the current fiat currency system it is the economy that needs government money to pay taxes. So under this scenario, if the government taxed American citizens and businesses $1.3 trillion and then, in the extreme case, spent none of it, a depression would inevitably follow in the frantic attempt to liquidate assets.
None of this, of course, is necessarily an endorsement of deficit spending. But Congress and the White House should ponder at what point the benefits of spending cuts exceed the cost. There is good reason to believe that spending cuts can serve a useful purpose in controlling inflation. But with inflation under control, as it is currently, there is equally compelling evidence that further spending cuts without matching tax cuts will prove recessionary and ultimately depressionary in their macroeconomic impact.
“But we need to balance the budget for our children and grandchildren,” comes the reply from the hard-core balanced-budget advocates on the left and right of the political spectrum. Well actually, there is no significant reason to believe that future generations will necessarily be unfairly burdened with a running deficit. The primary obligation of government is to provide future generations with a growing economic climate and sufficient economic infrastructure to compete effectively in an increasingly competitive global market. Surely if a balanced budget proves depressionary, government is not serving this larger purpose.
Nor is there any reason to believe, as some balanced-budget advocates contend, that future generations will be forced to pay back any lingering deficit. For one thing, in real terms, this would be virtually impossible; the GDP of future generations -all the goods and services offered up by that generation-belong to that generation and cannot possibly be passed backward through time to pay past debts. With a gold-standard, there was a price to pay; gold could be removed from the national supply to cover deficits. But under America’s current fiat currency system, a deficit really is nothing more than accounting.
WHAT ABOUT SAVINGS?
How about a deficit’s impact on savings? Some balanced-budget advocates contend that deficits eat into savings, thereby endangering the economic health of the nation. This, for instance, is largely the belief of the current Federal Reserve Board, including its chairman, Alan Greenspan. Yet this thinking overlooks the obvious. Real savings is more properly measured by real invest meet. If the effect of spending cuts without substantial accompanying tax cuts is to depress such investment, a balanced budget actually would impact savings, in a negative manner.
Beyond the economic ramifications, the embrace or rejection of these seldom-mentioned facts by American leaders will also likely have significant political ramifications. A political leader whose message is one of growth, expansion, and opportunity, for instance, will likely have a great chance at winning the hearts and minds of the American people, much like Ronald Reagan did with his powerful promises of economic expansion in 1980. Distressingly for Clinton’s reelection prospects, however, it appears that the White House is largely rejecting such a message.
This past January, for instance, Clinton’s chief economic adviser, Joseph Stiglitz, echoing administration sentiments, warned that the country’s current economic growth average of 2.5 percent is about the best that Washington can expect. He rejected the findings of Jack Kemp’s Commission on Economic Growth and Tax Reform that predicted that flat tax reform would likely double the country’s economic growth. Clinton’s message, as such, appears to be to convince the American people that there are inherent limits to their dreams and possibilities that we ought to adjust ourselves to a less-than-perfect economic climate.
To Clinton’s political benefit, however, it does not appear that congressional Republicans have, at least in the minds of many Americans, clearly defined a pro-growth economic agenda for the country either. Of course, many Republicans have championed such policies, but at least in part because of their ongoing obsession with a balanced budget that is based on a message of fear and frugality, this message has not resonated to the extent many Republicans may have hoped.
Yet there exists within some political (mostly Republican) circles great hopes that this message may still win the day. Echoing these sentiments, New York investment banker Felix Rohatyn, a leading candidate to fill a prominent Federal Reserve vacancy, observed in a New York Times op-ed piece last November that “the vast majority of the business community believes [the current economic growth rate] to be far short of our economy’s real capacity for noninflationary growth, as well as being inadequate to meet the nation’s private and public investment needs.”
Spurring growth and rejecting the ill-placed fears of some of our nation’s most hardened balanced-budget advocates represents perhaps the best hope for America’s economic advancement. But getting there will require a new look at some economic facts that, while currently not the focus of our political culture, require pressing attention.
Michael Johns served in the Bush administration as a speechwriter at the White House and U.S. Department of Commerce and previously as a policy aide to former New Jersey Gov. Thomas Kean. He is now a public-policy analyst and consultant based in Arlington, Virginia.
This post first appeared on The Center of the Universe blog site.
Gee,.. spending is always good and deficits are never a problem… tell that to the people of Greece.
Gee, that comment really adds value. Did you even read what he wrote? Hint: he didn’t say spending is always good and deficits are never a problem.
You also ignore the position of the US as a currency issuer and Greece as a currency user. Also the US has substantial private debts that are holding back the economy. If you look at countries like Ireland that had low debt and even a surplus before the crisis it was not enough to offset the massive private debt bubble collapsing. Irelands debt ratio has shot up to unmanageable levels all to save private creditors from their mistakes. Irelands private debts are still going to be a problem, because of the very long period of purgatory that bankrupts suffer in Ireland of twelve years, they have barely begun to be eliminated. So the economy is wholly dependent on external demand. If that growth were to disappear Ireland could rapidly find itself needing another bailout. Also if you were to slash government spending, there might be a mass exodus of immigrants but social collapse just like Greece.
There appears to be a new fallacy in the contents of this plan. That is a reduction in government spending without accompanying tax cuts will be recessionary. There is no proof that the tax cuts will be sufficient to maintain overall economic spending. It is simply a claim made by many. It depends on where the spending cuts are made and who gets the tax cuts.
If spending is cut in areas which have a high multiplier then the impact will be great. In a simplified model where the government spends only on 50% welfare with a multiplier of 1.6 and 50% defence with a multiplier of 0.4 which is accurate multipliers then if the spend is split evenly it will have (0.5×1.6)=0.8 and (0.5×0.4)=0.2 So net effect is a multiplier of 1. But if you were to go to the extreme and abolish welfare, pretty much what the Republican dream policy would include, so that the only spend left was defence with its low multiplier then the economy would only benefit from government spending (0.5×0.4)=0.2. It would depend on the tax cuts making up the shortfall in the expenditure of those that lost their welfare. That would be impossible because welfare recipients have the highest marginal propensity to consume. It would also depend on absolutely no additional savings being made, and all the tax cuts being spent, and then on domestically produced goods and services to maximise the stimulation to the economy. Since there is a high dependence on imports the benefits of the tax cuts would leak out. End result is that the overall level of GDP would fall. This would be be worse because this will create a deflationary cycle with falling incomes.
This also ignores who gets the tax cuts. If the tax cuts go to the super rich with very low marginal propensity to spend then it will have no stimulatory effect. If it went all to the very low paid then the chances are that the tax cuts would actually have a positive effect. Problem is that the low paid are unlikely to get enough of the tax cuts to make much difference. End result is that such a policy will only cause the economy to fall into a depression.
The concentration of attention on the government debt ignores the real problem of private debt, which is substantially higher. In recent months I have come to think that the real solution is a cap on private debts compared to GDP. This would create potential problems of “crowding out” but only between private citizens. Such situations simply do not exist right now as most are deleveraging. Without a credit bubble and debt bubble the fall out from an economic slowdown will be minimal. With a cap on overall and sector debt to GDP would in the long term would limit bubbles, to very manageable levels. The same would apply to bank failures. With overall debt levels lower the big banks would be smaller and so no longer systemically important.
The problem with a tax cutting policy is that it will not work in a deleveraging case. It would be better to raise taxes and spend them on areas with high multipliers, or cut areas with low multipliers and switch it to spending areas with a higher multiplier. Then once the economy is growing allow the deficit to fall to manageable levels without cutting taxes and then look at the debt and deficits once the economy is growing again.
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