(c) by Mark Dempsey
Don't get me wrong, federal spending isn't always good. The most recent initiator of massive deficit spending was the Milton Friedman acolyte Reagan administration 46 years ago. His deficits exceeded the sum of all previous ones, and for his trouble, Reagan got an average business cycle recovery, but jump-started the American oligarchy by cutting taxes on the wealthy roughly in half.
Here are US GDP growth rates, historically.
Note the two large increases in GDP growth in the early years graphed occurred with the New Deal and that big public works project called "World War II," both instances of big deficit spending. Both dwarf the "Morning in America" (the Wall St. Journal's expression) Reagan recovery in the '80s (see the graph above).
Milton Friedman's failures aside, let's consider the possibility that government "overspending" is at the root of inflation--a problem, not a solution. If the government spends too much money, it's certainly conceivable that the spending could bid up the prices of various resources, causing inflation. But what if the government activated otherwise idle resources--for example, with a job guarantee for the unemployed? What bidding would occur then? And would spending be the only initiator of inflation? Couldn't a shortage of critical goods like food or energy also explain an inflation surge?
One online commenter's remark decrying "25 years of massive deficit spending" implies that those deficits were inherently inflationary because they give money to the population, which was ultimately spent, bidding up prices. But supply and balance of payments issues precede all the hyperinflations (says a Cato Institute study). A public eager to save (in Japan) accompanies massive public debts, as high as 240% of GDP, without producing inflation, so the assertion that inflation is always the government's fault is at least myopic.
But shouldn't we reduce national debt? The US has been fooled by plausible deceivers like Friedman and has significantly reduced its debt seven times since 1776. The problem is that reducing spending or increasing taxes reduces national debt, and it ultimately injects fragility into the economy by reducing people's savings. One hundred percent of the time the significant national debt reductions have occurred in the US, they're followed by a massive wave of asset forfeitures and foreclosures--not a big surprise since smaller savings accounts reduce economic resilience.
The Great Depression followed such national debt reductions in the Coolidge and Hoover administrations, but perhaps the most dramatic instance of this phenomenon occurred when Andrew Jackson paid the debt off entirely in 1835, and closed the central bank that issued dollars. That meant there was no public currency. People did their business with monetized gold ("specie") and over 7,000 varieties of private bank notes of varying reliability. It was a business nightmare, which led to a wave of asset forfeitures and foreclosures called the "Panic of 1837"--a Great Depression-sized hole in the economy.
Independent of inflation considerations, one added dimension to this problem is the bizarre belief that dollars grow on billionaires. The government is not like a household that has to get its dollars from somewhere else (like billionaires). It literally makes all the (legal) dollars. Taxes create the demand for dollars; they don't provision federal programs.
In fact, the phrase "tax and spend" is an impossible sequence of events. Where would people get the dollars to pay taxes if the monopoly provider of dollars didn't spend them out into the economy first?
So it's not "tax and spend," it's "spend first, then retrieve some dollars in taxes." And what do we call the dollars spent, but not retrieved in taxes...you know, the ones in your wallet? First, they are the dollar financial assets of the population--people's savings. Perhaps less obviously, they are also national debt.
This is not exotic economics; it's double-entry bookkeeping.
In addition to his failed economic predictions, Milton Friedman gave intellectual respectability to the notion that the pursuit of profit excuses all behavior, no matter how bad. Politically interested people will even tell you, despite all the historical evidence to the contrary, that corporations are obliged by law to ignore the community, their workers, and society at large because they are compelled to pursue profit at all costs (The Ferengi ethic!). It's not true, but this is yet another demostration that you're as likely to get truth from a Friedmanite economist as you are from your opponents in a poker game.
