Do deficits matter? Conservatives have sometimes claimed that they don’t. Dick Cheney has said on more than one occasion that, “Reagan taught us that deficits don’t matter.” In fact, he said that to me personally once.
Supply-siders like me have often downplayed the importance of deficits, arguing as George Gilder and Jack Kemp argued in the 1980s that we can ‘grow our way out of it’. But we can only grow our way out of it if we actually grow. And if we don’t grow, there comes a time when debt grows to the point where it really is unsustainable.
That’s what is so insane about the compromise choir’s siren call for House Republicans to cave on raising taxes on upper income brackets, and on the debt ceiling. I think caving in on either of those issues would be a mistake, of course. But the idea of caving on both is utterly indefensible. If we’re going to engage in even more public debt accumulation, the only possible hope we have to deal with that problem is to ‘grow our way out of it’ like we did before. But we’re not going to grow our way out of anything by raising taxes on the upper income brackets, which are most adaptable to incentives.
And please don’t give me any of that nonsense about how we’d just be going back to the same taxes we had when Clinton was president. We would not. Far more people are above the $250,000 income level now than there were when Clinton raised taxes on them in the early 90s, and leaving the lower income cuts in place while rolling back the higher ones would make our tax code much more steeply progressive than it was then. Finally, Clinton did not have the Obamacare tax hikes, nor any of the other ‘taxes’ in the form of extremely high levels of regulation and dollar devaluation policies. If you want to go back to Clintonomics, be my guest, but take the whole winning formula.
But America is not currently taking the whole JFK/Reagan/Clinton/Bush II’s first term growth path. We’re taking maybe the worst anti-growth path since Hoover/Roosevelt, and that means that deficits matter quite a bit.
Yes, deficit hawks were wrong about the Reagan era, but U.S. debt levels at that time were below 50% of GDP during nearly all of both Reagan terms, rising only slightly above that level at the end of his second. Now, Gross National Debt as a percentage of GDP is over 100% and rising rapidly. Reagan’s annual borrowing hovered in the 3-5% of GDP category, while for the past few years the deficit has hovered around nearly 10% of GDP. Furthermore, Reagan’s much more limited borrowing was much more palatable to conservatives because a rather large component of it was being used to finance victory in the Cold War.
Let’s do a quick refresher on deficits and debt, the differences and the similarities. Deficits are temporary shortfalls in revenues relative to expenditures. Typically, they’re measured in annual increments. They’re an element of budgets. They’re associated with current operations. In accounting terms they’re similar to Profit and Loss Statements.
National debt, on the other hand, is the accumulated effect of operations during the whole life of the entity. In accounting terms it’s more of a balance sheet entity. Frequently in public discussions the terms ‘deficit’ and ‘debt’ or ‘national debt’ are used interchangeably. This is a serious mistake. They’re very different things which represent very different dangers. Failing to make this basic distinction helped lead to serious errors in outlook during the late 1980s, during which many observers who generally share sound presuppositions about the nature of the economy were given to histrionic predictions of national default, debt monetization, and hyperinflation. These predictions led to seriously ill-timed recommendations to overweight gold in investment portfolios.
On the left side of the spectrum, such focus on deficits, as opposed to national debt, led to a wave of hysteria in the early 1990s which helped create the political pressure to which President George H.W. Bush succumbed when he reneged on his “read my lips” pledge not to raise taxes. The fact of the matter is that, though deficits were high at the time, the national debt was roughly 50% of GDP: a concern, but hardly an emergency. The proper response would have been a focus on long-term spending control and pro-growth policies, not a panic-based, growth-discouraging tax hike.
Debt at the levels which we see now is far more dangerous than anything we saw in the 1980s. They’re at levels generally only seen during wars of existential import, such as our Civil War and World War II, or Britain’s Napoleonic Wars. At such times in history capital markets tolerated high levels of borrowing, at least for the victorious side. Such wars defeated long-time enemies, leading to valuable ‘peace dividends’ afterward. Such wars had very limited time spans, after which there was typically some sort of ‘return to normalcy’ (the phrase used to describe America’s economy after WWI).
Our current situation is not as sanguine. Though the Iraq War has in some sense come to a close, and the Afghan War is scheduled to end, it’s hardly clear that the results have been victories which leave enemies decisively vanquished. In fact, ideological movements sympathetic to the causes we defeated seem to be gaining, rather than losing, influence through the ‘Arab Spring’.
Furthermore, current spending and borrowing levels are more the result of domestic campaigns rather than foreign ones: to subsidies for solar and other green energy proposals, to structurally higher levels of spending on higher education, health care, and social services, as well as on Keynesian attempts to boost ‘aggregate demand’ (whatever that is). History has shown that wars on nebulous enemies like poverty or stagnation do not end with victory, but with capitulation, because the means which government employs for fighting such wars actually create more of the thing the government is fighting against. Poverty never surrenders; stagnation never surrenders; in fact, these things are strengthened by the methods governments use to oppose them.
In short, we will lose our current war on whatever (Stagnation? Inequality? Injustice? Despair?) because our government is really waging a war on reality, and reality always wins.
Mr. Bowyer is the author of "The Free Market Capitalists Survival Guide," published by HarperCollins, and a columnist for Forbes.com.
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