The worst thing for a country's economy is for legislators to borrow money for deficit spending during economic downturns. Too bad no one agrees, including those perhaps pre-disposed to agree.
For background, a recent Washington Post editorial lamented that “During a three-year span of low unemployment, economic expansion, increasing revenue and no major foreign wars, the budget deficit was larger as a share of the economy than any year of the 1930s, the decade of the Great Depression.” The Post’s implied point found can be found in the title of the aforementioned editorial: “Running deficits larger than during the Great Depression is reckless.” The increasingly market-oriented editorialists at the Post could perhaps be persuaded that the editorial and title mistake the cause of growth, and that’s not because deficit spending boosts it. Quite the opposite, which is the point.
To distinguish between government spending based on taxes collected versus monies borrowed is for one to make a distinction without a difference. The economy is damaged by the spending either way simply because when governments spend, they’re substituting themselves for the marketplace in the allocation of precious goods, services and labor.
The Post’s editorial suggests that the central, politicized planning of resources has laudatory qualities in downturns such that U.S. politicians should hold back on their waste during good times so that they can ramp up the politicized waste during down times. That’s not right.
For one, the Post editorial furthers the surely false perception that governments must start spending when those in the private sector apparently aren’t. But if the producers of the wealth are acting carefully with it, how does it aid them economically if the taxing authority acts wastefully with money not its own?
Furthermore, no act of saving in the private sector ever subtracts from “demand" as is, owing to the simple truth that banks and other financial institutions don’t pay for savings just to stare at the dollars. Instead, they pay for private savings to immediately lend them out to individuals and businesses with near and long-term consumptive needs. There's no need for governments that produce nothing to spend when producers aren't.
The Post editorial adds that a mix of congressmen from both Parties is nobly trying “not even” for “a balanced budget,” but “just a sane one.” “Sane” is apparently targeting a deficit of “3 percent of GDP by 2030.”
The editorial is clear that the budget plan “is not chest-thumping by budget hawks demanding a balanced budget immediately.” With this, the Post gets stuck in the fallacious notion that small, limited government can be found in budgetary balance. There’s no such thing, and evidence supporting the previous claim can be found in the very deficits and debt that have the Post’s editorial page, along with Reps. Lloyd Smucker, Scott Peters, Bill Huizenga, and Mike Quigley so up in arms to begin with.
Indeed, contemplate the $38 trillion (and counting) national debt. The size of the latter is a powerful market signal that tax revenues aren’t just set to grow, rather they’ll soar. Entities that can borrow a lot of money are expected to take in a lot of money in the future. Which means the size of government is set to soar in the future regardless of whether the budget is in balance.
The Post asks the question, “If the deficit is already greater than Great Depression levels during a peacetime expansion, where will it go during the next crisis?” Hopefully it plummets. Keynes doesn't gain legitimacy during downturns.
