The Balanced Budget - Richard Sale

by Richard Sale, author of Clinton’s Secret Wars 

The chief result of the struggle between the impulse to reform and classical economic liberalism in the early part of the 20^th century was the welfare state. These partial triumphs of reform occurred because more and more of the population wanted an increase in bargaining power with the great concentrations of wealth, some additional leverage that would provide some reprieve from the harshness of Fate and Misfortune, some badly needed security and protection for the bulk of the people that it had never enjoyed. 

Conventional wisdom – which is to say sanctified hearsay and cliche – had argued for years that the American economic system had no flaws -- that capitalism was a process ordained by God to separate the weak from the strong, the energetic and daring from the ordinary and inert. 

The dogma that claimed Big Business system was God-ordained and that the millionaire was the finest flower of American civilization was at last toppled from its pedestal because the dogma of conventional wisdom had been rendered obsolete by events. People may find it hard to reason, but most of them are able to see, and when dogma cannot account for the facts of experience, dogma falters.  

Yet in America, today one of most intellectually uninformed countries of the modern Western world, it is  surprises no one to find that conventional wisdom has once again raised its bald, crinkled and toothless head on the subject of the Balanced Budget. Until the oncoming of the Great Depression, the Balanced Budget was the bedrock principle for American capitalism or, as Galbraith puts it, “the sound and sensible management of the public purse..”  FDR devoutly believed in it when he came into office, and as did his predecessor, Herbert Hoover. 

In decades past, there were radio broadcasts purveying folksy little images which alleged that the government was just like a household and had to take in as much money as it paid out. Anything else was reckless and wasteful.  But once again events had worked to undermine cliche and dogma.  People began to see tht financial responsibility did not depend on trite little rules of household thrift  but an effective integration of far more potent and  intractable factors. In fact, it was mass unemployment that worked most to show reality must be viewed.  Extra  government spending was needed in order to put people back to work, and putting people back to work meant giving them the ability to buy goods the purchase of which would in time would help to add more people to the workforce, etc.  

During the Depression, even the Republicans and the Business Community feared to repudiate deficit spending because they were afraid of the public reaction. Yet in back of their fear, they still clung to the dogma that national salivation lay with cutting welfare spending and increasing tax rates. Increasing taxes of course  increased a consumer’s costs of living and reduced his or her income , and thus demand.  When this was tried in 1937, it caused a near-collapse of the infant recovery, as I noted in an earlier piece.. The program only increased unemployment and suffering and reduced the public demand for more goods and was quickly abandoned. 

The chief point is that deficit spending is not a sinister device that attempts to enslave the national liberty as the Republicans insist. Even President Herbert Hoover, the most orthodox defender of American capitalism, had tried deficit spending during the 1928-9 crisis. In spite of his public homage to the Balanced Budget dogma, Hoover ‘s receipts had not kept pace with his outlays and his government had run up $3 billion in deficit spending by the end of 1932.  FDR  came into office like Hoover, believing in reduced government expenditures and a balanced budget and only slowly  modified his beliefs ,under the duress of circumstances,  chiefly after the 1937 incident related above. 

The new cry for a Balanced Budget is simply an outdated facet of that dogma that claims that any restraints on unfettered predatory economics by means of Factory Acts, unemployment relief, social security or even laws against child labor would result in chaos and the end of everything sound and good in the world. What irks me most about the latest Republican rant about cutting government is that this is just another way to revive the doctrine that an expanding sense of concern and obligation by the stronger members of a society towards the weaker will threaten economic progress. It is the same heartless assertion, clad in a nicer dress, that the free market, if let alone, can solve anything, ignoring the fact that the failure of Hoover showed clearly that the government had to become an agent of national betterment since voluntary or state efforts were clearly inadequate. 

It is my view that the current cry for spending cuts is simply another bogus cry for a bogus reform that the Republicans know in advance will not work. 

As Galbraith points out the popular protest against the wastefulness and inefficiency of government is part of our political DNA and one cannot go wrong raising the cry. But the cry ignores the fact that very important government functions can be performed even though they are wasteful and it  is easier to cut the function than eliminate the waste. Yet the cry is always raised.  Cutting expenditures is more theater than reality, but it makes good copy. Ask the Tea Party people. 

I am obviously not an economist, simply an ordinary person trying to puzzle out the meaning of events. But in the Republican criticism of deficit spending, I sense that that the GOP stance is not well thought out or meant to improve anything except mass desperation in misfortune and, by using such means, increase the GOP’s  political power. 

One fact should not be forgotten, however. In economic crises, the Republicans over and over have shown that they cannot lead. When the 1929 crisis came, Hoover’s measures were orthodox business ones -- cut production, cut employment, and maintain prices – in time the economy would heal itself. But the facts show that this course of action only made matters worse. 

In the 1936 election, when the GOP lacked the courage to activity try and repeal the New Deal, it spent its energies instead trying to sabotage its Democratic rival by lying about it. On the subject of Social Security, for example, companies put into their worker’s pay envelopes lurid claims that in paying a payroll tax, workers were giving money to Congress that they might never get back.  It was dishonest and, in hindsight, disgusting. 

What we are seeing today is more of the same.

 

Comments

[walrus]

Almost all of the Republican party, and almost all of the Democrats are in the grip of forces that wish ill for the majority of American people. Their attack on deficit spending is deliberately targeted to weaken Government and manufacture further crisis that their backers can profit from, including the election of a Republican President and control of both houses in 2012.

The problem with both stupidity and evil is that ordinary rational folk do not understand, let alone believe, that there are people among them who do not mean them well.

It is obvious that the Taliban don't mean us well. It is not so obvious that there is an American oligarchy that wish to roll back The New Deal, destroy everything it stood for, and perpetually enslave average Americans to said very rich oligarchy.

This disbelief of the power of evil is what killed many Thousands of German Jews; "I'm a war veteran!", "I'm a medical specialist!", "Why would Hitler want to get rid of me? That would be totally irrational and would hurt Germany!" - total disbelief that anyone could make such an economically harmful vision.

Keynsian economics works. The economic stimulus was too little, too late. While I will make allowances for some idiots in Congress, the majority of people with a tertiary education involving Economics 101 knows this. Those that don't believe it may be safely catalogued with Flat Earthers, creationists and Birthers.

So let's reformulate the question; why is Congress intent on pursuing an economic strategy that is poisonous for the average American? Simple; they wish to enslave you. They do not have your best interests at heart. Their backers, offered a choice between a vibrant and prosperous America where any man is as good as another, and a less prosperous one, where the power of the rich is absolute, chose the latter.

To put it another way, you are getting an aristocracy whether you like it or not. I recently watched an American group of friends from the West Coast tear themselves apart over "access" to one of their number who has come into maybe $100 million. They talk about him like royalty. Who gets invited to what party? Which couple were invited to stay with them at the villa in Tuscany last summer? I kid you not.

The tools of repression are almost all in place. The TSA has made no secret of its desire to increase "security" on trains and buses to the same level as airports. Number plate recognition cameras can track the movement of cars very easily. Control of movement is a tool of a Police State. So is control of information flow.

The mainstream media are already firmly controlled, another perquisite of a Police State, leaving the internet as the only other avenue of free expression.....oh wait1 The Government wants to have the power to shut down "pirate" websites!

http://www.wired.com/threatlevel/2010/09/justice-department-piracy/

[Norbert M. Salamon]

Thank Mr. Sale' effort to place this issue into historical and political analysis.

To achieve a Balanced Budget, nay something close to Balanced Budget, it would be necessary to repudiate the Supremes with respect to human rights for legal constructs - namely unlimited corruption of politicians by unlimited financing of their elections by the moneyed class and/or their agents, K- Street. BRIBERY IS NOT FREEDOM OF SPEECH!

The nature of democratic elections [which is not possible now due to election finance] requires that the electorate be informed of issues [which is now replaced by lying and hype] and also understand these issues, which is impossible due to the horrible education system prevading most of the USA [and Canada, UK et al].

When the RULE OF LAW disappears [as it effectively did with respect to Nurnberg judgement v. IRaq, Geneva Convention v Torture, fraud v, Wall Street, funding Social Security and other public pension plans vs, Ponzi schema therein - as the funds were spent on general operations of governments etc] the basis of democracy disappears, and the ruling elite [oligarchy and purchased politicians] debase honor, and with it the national economy's rational analysis.

Republicans and blue dog Democrats want to cut social spending, not wars, not taxation loop-holes, not big business subsidies, etc.

Analyzing the current deficits since the financial blow-up, it appears that the ending of wars [and forward positions of some 800 bases]combined with the elimination of bush tax-cuts and a few minor details would balance the budget witout cutting into needed social services.

Going forward SS payment should be extended to all forms of income without limit and the qualifying age must be raised - to reflect longevity of current population in contrast to the time of SS's establishement.

The other necessary step is to reform Medical cost structures, cut out insurance comnpanies' profit requirement - except for extra insurance over that provided by the nation.

The problem of peak oil and other peak natural resource availability and the problem of global warming also has to be addressed. These requiremtns are similar in damand to that experienced during WWII, and require sacrifice from all citizens.

This type of steps, will of course, cause hardships for many in the immediate future, while evading these steps will cause complete collapse in the very near mid term.

Am most sorry that the prognosis is so disheartheniong.

[R Whitman]

Left to itself, a free, unregulated market economy will crash and burn from its own excesses. How do we know this? Every economy of this model since 1600 has crashed. Every command economy that was centrally directed has died of stagnation. The Eastern European socialist model of the last half of the 20th century and the religious/idealist co-operatves of the late 19th and early 20th century no longer exist.

It is ridiculous to expect the present day melding of these two economic forms will be any more sucessful in the long run.

[William R. Cumming]

Well disagree that social security and other measures begun in the US in the first half of the 20th Century were grounded in policy of wealth distribution or economic fairness. Bismarck Germany was the inventor of social security and some other forms of state assistance. Designed to deal with massive requirements of mass armies during mobilization and deprivation of family economic security. Then FDR was faced not only with the Soviet Revolution and its policies, but the coincidence of the election of Hitler in 1932 the same year FDR was elected. Again Hitler's domestic social policy was almost entirely structured to assist mobilization and war fighting efforts. The difference between the corporate socialism in the US today and NAZI Germany is primarily the issue of ethnic and religious "cleansing"!
The pathological German attitudes on race have some attraction today but fortunately are not the views of the major political parties in Western Europe and the US. Few of the top 500 corporations in the US have achieved that rank without any form of direct or indirect assistance, including tax breaks. The American tradition is "mixed" capitalism until the recent bailouts. Now apparently the FIRE sector which appears to not have a legitimate economically sound business plan except shopping around the world for higher interest rates rather than corporate expansion is the preferred target for government largess. There are some recent studies indicating that the banking sector over the entire history of the US has not been a profitable activity in any tradition sense of capitalism. There is no question that payroll taxes are highly regressive but the corporate income tax revenues have dwindled since WWII into insignificance.

I am not trained in economics but I find fascinating that the profession as a whole cannot agree on whether the US faces inflation or deflation in the next decade. Policies are very different depending on which course of the economy is correct. It does appear that an economy in which housing was the basic investment strategy of the middle class may have been destroyed by securitization and the failure of the FIRE sector to comply with laws mandating that liens on property, deeds of trust, other loans against the property as they are paid off or created be recorded at the local court house. Apparently this issue effects all home loans and refis done in the last 15 years when securitization started in a big way.

[Farmer Don]

I think Richard misses the main point. Deficit spending is not good or bad in itself.
WHAT you borrow the money for is the important thing. If you borrow money for a new truck so that your business grows then you hopefully will have a balanced budget in the future. If you borrow money for booze and cigs, you are looking for trouble.
The Problem with the US deficit is that it has been used for useless wars and foreign policy which not only is a waste but has caused overall business to be less competitive with the added cost of running gov't departments like home land security.
Conservative people in the US are always calling for a balanced budget but never think of cutting the horrendous spending of the military.
Liberal people call for more spending but don't see that spending more while wasting it all on the military is a recipe for a lower standard of living for all.

[Jackie]

anonymous: Thank you for pointing out that the real elephant in the room is not Social Security but Medicare. I was so aggravated in '05 when Bush said SS was in trouble and it is really Medicare that is the problem. Then again, the man always did aim for the wrong target.

[Jake]

Something like "Treasury One" ( http://www.policyarchive.org/handle/10207/bitstreams/9166.pdf )would force the issue of balancing the budget. Besides being a good deal for everyone.

[Joan]

William R Cumming - I could follow your excellent comments much beter if you would (please) break them up into even arbitrary smaller paragraphs.

Your attempted follower

[WILL]

Sidelsky on Keynes: Implicit in any Gov't Stimulus is Wasteful Spending. But that is OUTWEIGHED by the wastefulness of human misery & 10% unemployment for five years. he explains the paradox of thrift & sticky wages.

"Part I: Keynesianism | EconStories.tv
econstories.tv
Is our prosperity derived from a continual circular flow of spending? Is it impossible for a society to increase it's total savings? Can deficit spending by a government step in to replace private activity in order to maintain full employment and restore lasting economic growth? What is a liquidity trap?
"
http://econstories.tv/2010/10/25/part-i-keynesianism-%E2%80%93-it%E2%80%99s-all-about-spending/

http://www.youtube.com/watch?v=d0nERTFo-Sk"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem

[Jib Halyard]

Let's see: the cost of labour and materials are at an all-time low, and so is the cost of borrowing money. Would this not be the ideal time for the US govt to get in all its infrastructure and capital spending? That's how things would work in a "well-run household".

[William R. Cumming]

Joan! Will try to do better. Yes my writing is quite strange, as is my brain.

[Fred]

Walrus,

Here's the next step to the police state, ending trial by jury because you don't like the result:
http://www.nytimes.com/2010/11/19/nyregion/19detainees.html?src=me

[elkern]

The Republicans have zero cred on deficit spending. More accurately, they have Cred = -9,50,000,000,000 = approx Deficit increase under Reagan & Bush Jr. (see zfacts.com for decent backup)

In the short run, Keynes is just plain right: deficit spending heats up the economy. Obama's right: this is a good time to do exactly that. Bush Jr's deficit spending was stupid: deficit spending in boom times overheats the economy, puffs up bubbles, & makes borrowing more expensive the next time you need it (now).

The Republicans don't really care about the deficit, or even, apparently, the US (or world) economy. They seem to be hoping that slamming on the brakes now will ensure high unemployment in 2012, undermining Obama's chances for re-election. If the Democrats go along with it, they deserve what they get - and maybe, so will we.

In the long run, Farmer Don has it exactly right: the only thing which matters is WHAT PEOPLE DO (or don't do). Money is merely a societally accepted tool for motivating humans. Wasteful spending will heat up the economy for a few years just as well as "wasteless" spending, but down the line, it makes a huge difference. Investments in infrastructure, education, etc, make every unit of future labor more valuable. Consumption - "booze & cigs" - often has a negative "Return On Investment", mostly in health care costs & lost labor.

The tough question is really how to invest in infrastructure to maximize future use & minimize future (operational) cost. More roads? Hmmm... what's gas going to cost 20 years down the line?

And as others have wondered here recently, how can we get the US Congress to pay attention to the needs of our country (& planet) when they spend most of their time raising money for their next campaign.

My quick answer is IRV (Instant Runoff Voting). Get your state legislature to pass it, and you'll be able to support third-party candidates without tipping elections to the worse jerks (D or R, take your pick). Voting FOR, rather than AGAINST will also reduce negative ads.

IRV won't fix evertyhing, but it could be a good start.

[Eric Dönges]

Mr Cumming,

Bismarck Germany was the inventor of social security and some other forms of state assistance. Designed to deal with massive requirements of mass armies during mobilization and deprivation of family economic security.

I think you are wrong. After the creation of the German Empire in 1870/71 Bismark was not interested in further wars. He created social security to prevent Germany's working class from turning to socialism en mass. It is one of the few domestic policies of his that where successful.

It seems to me that America's free marker worshipers think that simply denouncing any form of Socialism as "un-American" will work just as well; I think they are in for a very nasty surprise when average Americans finally realize they're being conned.

[Andy]

Mr. Sale,

The new cry for a Balanced Budget is simply an outdated facet of that dogma that claims that any restraints on unfettered predatory economics by means of Factory Acts, unemployment relief, social security or even laws against child labor would result in chaos and the end of everything sound and good in the world.

The problem with your analysis is that this isn't the 1930's. The simple fact is that we will be running deficits regardless of what either party claims because decades of deficit spending through good times and bad has brought us to the point where balancing the budget cannot be accomplished with marginal measures. We're going to pay over $400 billion this year just in interest payments. By 2020, the CBO projects that will rise to between $700 billion and a trillion per year, assuming this country can still borrow and refinance debt at reasonable rates.

It is the same heartless assertion, clad in a nicer dress, that the free market, if let alone, can solve anything, ignoring the fact that the failure of Hoover showed clearly that the government had to become an agent of national betterment since voluntary or state efforts were clearly inadequate.

Then tell me how this ends? Currently the costs for many of our social programs are increasing faster than the revenue streams that support them. That is, by definition, unsustainable. Raising additional revenue, by whatever means, only delays the problem as long as cost growth exceeds revenue growth. We spend much more than our OECD peers on health care, on education and many other social government functions achieving worse outcomes, yet we are still expected to fund those programs regardless of cost?

Again, how does this end? For members of my generation the future does not look good thanks to two broken political ideologies that don't have the interests of this nation as first principles.

[crf]

The analogy of a family cutting their children off from college in order to balance the budget is very apt. It's a bad decision by this family: short term gain for long term pain. You don't want government balancing their budget like this family would!

To some degree, this was tried in Canada during its deficit fighting during the 1990s and early 2000s. While budgets were cut, less emphasis was put on improving higher education as opposed to maintaining health spending. There was a great article in the Walrus magazine about the long term consequences of these budgetary decisions.

Who killed Canada's Education advantage?

[WILL]

"Before the Tea Party philosophy is ever even tested in America, it will have succeeded, or it will have failed, in Great Britain.

For in David Cameron the Brits have a prime minister who can fairly be described as a Tea Party Tory. Casting aside the guidance of Lord Keynes — government-induced deficits are the right remedy for recessions — Cameron has bet his own and his party’s future on the new austerity. He is making Maggie Thatcher look like Tip O’Neill."

http://buchanan.org/blog/tea-party-tory-4530

we shall see over at Albion, the land of Keynes, that has turned its back on him, how this belt tightening stuff works out!

[William R. Cumming]

Eric! Perhaps you are right. But I relied on knowledge gained by several different English language histories of Germany. A remarkable dearth of those by the way. Bismarck did enter a period when he believed consolidation of the Empire as opposed to "Foreign" wars was necessary. But the military factor was definitely there to some extent. Germany's leaders always feared Socialism and Communism even while succumbing to Nazism. And of course hate of the "other" was used to drive dictatorship.

[Eric Dönges]

William,

But the military factor was definitely there to some extent.

But not for social security. Note that Prussia had started giving financial assistance to the widows of Prussian officers in 1792; this was extended to all Prussian civil servants in 1817. What Bismark did was to make health insurance mandatory for all German workers in 1883, and casualty insurance in 1884. Old age insurance was added in 1891. None of these are necessary for or in aid of military mobilization.

I'd also like to point out that the (second) German Empire was no more warlike than any of its European counterparts; in fact if you count all the colonial wars of the period, both France and the British Empire where much more belligerent. Germany was not solely or even mostly responsible for World War I - all the European powers wanted that war, and all for the same reason - to prevent the collapse of their obsolete social orders.

[William R. Cumming]

Thanks Eric and I salute your scholarship. It does usually take two at least to fight a war.

[Carl O.]

Very good piece. There's one thing missing, however, and that is the history of the origins of the whole balanced budget ntion. In fact, as I discovered when I did some research on this sveral years ago, the idea of the "executive budget," based on the notion that the government's main responsibility was "economy and efficiency" in government expenditures, was imported here from Britain in the years prior to World War I, and enthusiastically backed by Wall Street. The Brookings Institution was set up in 1915 or so expressly to lobby for the adoption of the executive budget, and its founders wrote several books on the topic, including a paen to the British Parliamentary system. The promoters of the executive budget all considered the British system superior to the American Constitutional system. In 1921, they were partially successful in insinuating elements of that British system into our own with the signing into law of the Budget and Accounting Act, which created the Bureau of the Budget, now known as the Office of Management and Budget. Their whole aim, then, as now, was to replace the protection of the general welfare, enshrined in the preamble of our Constitution, with the requirement that the demands of monetary accounting come ahead of all other considerations, the same demand that today's budget hawks are making now. Seems damn near treasonous to me.

[graywolf]

"....companies put into their worker’s pay envelopes lurid claims that in paying a payroll tax, workers were giving money to Congress that they might never get back. It was dishonest and, in hindsight, disgusting."
And quite possibly coming true in the near future.

[Patrick Lang]

graywolf

SS? I've been told that since I started to pay into SS at 16. Often those telling me that were in the business of selling annuities and other securities. My wife and I have been collecting SS for five years. pl

[Fred]

Some life insurance companines also don't honor thier contracts either, but its just 'business':

http://articles.latimes.com/2010/nov/21/local/la-me-life-insure-20101121