Deficits and Samuelson's Moral Confusion

 

This blog seems to have settled into a once-a-week schedule; maybe it should be renamed the “weekend economist”.  But I hope this is a temporary circumstance.  There is plenty to blog about, but it’s been hard in the last few weeks to do it in the evenings. 

Today I have a particular disincentive: I am having some damned assertive lower back issues, and it hurts to sit here and type.  But no matter.  It’s Sunday, so I feel a responsibility to comment.

And what I want to talk about today is nearly a week old: it is a column by Robert Samuelson from last Monday.  It was abysmal.  It was much worse than abysmal, in fact.  It was so intellectually lazy that it was insulting to the world for the Washington Post to publish it.  I used to have some respect for Samuelson; I thought he was at least trying.  But he made it clear in Monday’s column that he has given up trying for any kind of honesty or clarity; he is relying entirely on wishes and unthinking moral indignation to produce his economic views.

I’m sure you think I’m kidding.  But I’m not.  He tries to blame our current recession, and all of our recent deficits, on John Kennedy’s decision half a century ago, in the beginning days of the 1960’s, to intentionally run a deficit to stimulate the economy.  He presents no facts to back this up, other than a long recital of economic problems that have bugged him over the intervening years, and that, for no clear reason, he wants to blame on Kennedy.  Fortunately, a Washington Post reader named Chris Siple wrote a few days later to point out that deficits throughout the sixties were low, averaging roughly 1% of GDP even after Kennedy’s tax cuts.  He  also pointed out that deficits as a fraction of GDP began to rise not in the sixties, or even in the seventies, but in the eighties after the Reagan tax cuts, and averaged 4% of GDP during that decade.  They fell again over the nineties, largely under Bill Clinton, and the nineties ended with budget surpluses, and then deficits rose again to 4% to 5% of GDP under Bush after the Bush tax cuts.  And these were deficits during the economic good years!

Samuelson blames the inflation of the seventies on Kennedy’s early sixties tax cut, ignoring much more proximate possible causes, such as a major war in Vietnam that we failed to fully finance, and a 10-fold growth in the cost of a barrel of oil over the course of the seventies (from $3.60 per barrel in 1970 to $36 per barrel in 1980)---a modern equivalent would be an increase from the current price of about $85 per barrel to a cost in 2022 of $850 per barrel.  Frankly, I doubt if the current economy, with current economic policies, would fare nearly as well as we did through the 1970s if oil prices were to rise at anything like that rate. Think about it.  We completely panic when oil prices break $100 a barrel.

Samuelson blames the recession of the early 1980’s on the Kennedy tax cuts twenty years earlier, ignoring the role played by Paul Volcker as Chairman of the Federal Reserve in intentionally creating that recession by very tight money policies in order to cut short an emerging culture of inflationary expectations; and he ignores the role that Volcker and the Fed played in releasing the money supply a few years later, creating the “morning again in America” recovery, which, in contrast to our current recession, was nearly instant when the Fed released the brakes. 

Samuelson blames the current policy paralysis on Kennedy’s tax cuts 50 years ago, claiming that  “The careless resort to deficits in the past has made them harder to use in the present, when the justification is stronger”.  It's an easy, tempting assertion.  But even if that were true, the deficits that produced our current large debt were created by tax cuts under Ronald Reagan and continued under the first Bush presidency, were resolved in the 1990s, and then were created again in the first decade of this century by renewed tax cuts under a new President Bush.  In all cases, the deficits were the result of deliberate policy decisions in the decade they happened, not some long delayed impact of a distant historic event.

Samuelson blames a hypothetical change in American sentiment toward deficits on the Kennedy tax cuts, saying that   “Until the 1960s, Americans generally believed in low inflation and balanced budgets.”  But the truth is that Americans have often run deficits to fund major efforts---usually wars.  After the Revolutionary War the federal debt ended up as about 35% of GDP.  After the Civil War, the U.S. debt was again at 33% of GDP.  We ran substantial deficits to finance our participation in World War I, and again throughout the nineteen-thirties while trying to recover from the great depression, and we ran enormous deficits in the nineteen-forties to finance our participation in the Second World War.  At the end of that war the U.S. public debt was over 120% of GDP, far higher than it is now.  Over the next thirty five years or so the debt as a fraction of GDP slowly shrank, not because the U.S. stopped running deficits---we ran deficits throughout that period, with only rare exceptions---but because the GDP grew enough to swamp any additions to debt our continuing deficits created.  The debt shrank as a share of GDP before the Kennedy tax cuts from the end of the war, and after the Kennedy tax cuts throughout the sixties, and throughout the seventies; enacting Kennedy’s tax cuts did not alter that trajectory by more than a hair.  By the end of the seventies federal debt was down to about 30% of GDP.  The truth is that sentiment about deficits didn’t change much from the fifties to the sixties; indeed, it did not seriously change until the trauma of the oil embargo and the stagflation of the seventies, and did not publicly change until Reagan declared that “the Government is the problem”, David Stockman declared that the Reagan administration’s goal was to “starve the beast” (meaning the federal government), and Grover Norquist declared that he wanted to shrink his country’s government enough so that he could “drown it in a bathtub”, all by reducing revenues, and intentionally creating large deficits.  These people did not create deficits from some Keynesian urge to help the economy through stimulus, but in a carefully considered affort to cripple their own government by limiting its capacity for action.  If the exploding deficits of the eighties and of the oughts have created limitations, they have done so because that was their deliberate and publicly stated purpose.  And that, support for the use of deficits to intentionally restrict government action, is the true change in the American attitude toward deficits.

But in spite of the long Stockton/Norquist assault, it is not even true that deficits are economically impossible now.  We don’t want a deficit in excess of GDP growth forever, but there is no good economic reason that we can’t run very substantial deficits in the short run.   We can, and we can do so in the current economic circumstances without risking any great economic calamity in the future, as long as we reduce the deficits when recovery is well established.  At that point, we can reduce the debt-to-GDP ratio the old fashioned way: by allowing nominal GDP growth (real growth plus inflation) to shrink the debt burden over time, as it did from the forties until the eighties.

Samuelson claims that Kennedy’s advisors “contended that deficits weren’t immoral and could be manipulated to boost economic performance”, and that “This destroyed the intellectual and moral props for balanced budgets.”    Wow.  Immoral?  They are a sequence of numbers in the National Income and Product Accounts, not a sin, and for economists they are, or should be, a tool, not a cause.   If they help, then use them.  If they don’t, then don’t use them.  But don’t bias your economic judgments, which should be intellectual and based on data, by turning what should be a study into a moral cause. 

And it is by no means true that we can do nothing to improve the deficit picture: we can raise taxes on the wealthy, not only by raising their tax rates but by eliminating the kinds of tax loopholes like “earned interest”, by treating capital gains and dividends as ordinary income, by extending FICA taxes to 90% of wage earners.  To quell the screams of the outraged at this list, I should point out that every single one of these suggestions except raising the tax rates was proposed in the Simpson-Bowles plan.  But in the short run, we should use the revenues we gain from those tax changes to increase block grants to the states to re-hire the teachers, police, firefighters and others that they have fired over the last few years, to directly fund contracted work on infrastructure in the hardest-hit states, to provide assistance and incentives for banks to lend at low rates to households that are currently underwater or nearly so. 

The abstract numbers in the National Income and Product Accounts can’t be moral or immoral, they are just accounts.  But the impacts of economic policy, and of policy failures, can.   Right now millions of lives are being crippled by lack of opportunity, millions of households are suffering, millions of young people are putting off or abandoning too-expensive college because they have no jobs to pay for it, infrastructure is crumbling, state governments continue to lay of the people we depend on to help, to protect, to teach.  We can end that, all of it.  We should.