IS deficit spending "a potent recession cure when administered properly"?
A newspaper business writer made this assertion in an article titled "The Budget Deficit Faced by Many States." But is it true, that it's a good thing when governments spend more than they take in? Remember, in Bias: A CBS Insider Exposes How the Media Distort the News, former CBS-reporter-turned-media-critic Bernard Goldberg called reporters who write about business and the economy economic "dunces."
So, I sent the newspaper article to economics professor George Reisman, author of the well-received book Capitalism: A Treatise on Economics.
Elder: Is deficit spending a potent recession cure when administered properly?
Reisman: That is a view held by a large school of economists, perhaps the majority school, for the last 60 years or so -- that's the Keynesian school -- but there are other economists like those in the Austrian school, which holds a very different position. In their view, an essential requirement to a sound economy is balanced budgets with small government. We want government limited to protecting life and property. The government should be attacking terrorists, providing police protection against common criminals, and that should be essentially it, and the people in an environment free from terror will proceed to provide for themselves economically. That has been the basic philosophy on which the United States was built.
Elder: I know you're not a journalist, but isn't it unfair to make this statement, "Deficit spending is a potent recession cure when administered properly," as if it's a fact?
Reisman: No, it is definitely not a fact, and it displays considerable ignorance which leaves out of account any alternative point of view, and, in fact, it's easy to argue that deficits can pretty well worsen recessions with depression, because one of the main characteristics of any severe recession is widespread bankruptcy. Deficits contribute to that by withdrawing capital from availability for business -- the deficits absorb savings, and those savings are then not available to be lent to business firms in need of credit, so more firms go under than would otherwise have gone under, and that worsens the depression or recession.
Elder: Is it too strong to say that this guy is simply wrong?
Reisman: I would say he's definitely wrong. The most logical case to be made for what he's saying -- it's not deficits in and of themselves that promote spending, although he seems to think so. He seems to think that a dollar spent by the government is somehow more beneficial than a dollar spent by you or me, which is ridiculous. What people really have in mind to advocate this position is that the government will run at a deficit and not borrow from the general public ... but will manufacture the money -- print it. So they'll enlarge total spending. So it's this mentality I would think more than anything else that's been responsible for our problems with inflation for the last 65 years or so. Every year there is more and more money out there ... the rise in spending just outstrips the increase in production and the supply of goods, and so prices continually rise ...
Elder: Give me your quick reaction to politicians who support ... increasing minimum wage laws ...
Reisman: They're responsible for causing unemployment and preventing people from gaining the job skills they would learn if they got a job, and keeping them unqualified, possibly, for their entire lives.
Elder: The correct minimum wage should be zero?
Reisman: There should be no government interference with wage rates; they should not attempt to make wage rates higher or lower than the free market momentum.
Reisman: Medicare is responsible for a further run-up in the costs of medical care. The government is throwing more money in to a situation in which it has artificially limited the supply of doctors and limits the availability of new medication. Imagine if we had an auction -- and there are people who would be outbid because of previous government interference, and now the government throws more money into the hands of the bidders so the prices will just go on higher and higher.
Elder: Why the widespread myth that FDR's policies "got us out of the Depression"?
Reisman: I think that fits with the statist preconceptions. If you view the government as some kind of deity, and you think it's omniscient and omnipotent, then that's your basic expectation ...
Many believe, like that business writer, that governments can spend their way out of a recession. Never mind that Argentina and Japan met disaster following that course. As economist Paul Craig Roberts once said, "As the adage goes, it is hard to teach old dogs new tricks, and Keynesians, who have spent four decades thinking in terms of spending and demand, find it hard to understand arguments about incentive and supply."
Dunce cap, anyone?