Opinion Editorial | |
| Monday, August 9, 1999 | |
The Economic Effects of Deficits and Surpluses |
Lately, both Republicans and Democrats seem to be convinced that running huge budget surpluses has enormously positive economic effects. Hence, many oppose tax cuts because they believe that hoarding the money and paying down the debt will be better for the economy. In truth, there is really very little evidence that the debt imposes a significant economic burden and, consequently, there is no reason to think that paying down the debt offers much economic benefit.
I believe that the origin of the paying-down-the-debt-is-good notion originated from the idea that deficits -- the annual increment to the debt -- have extremely negative consequences. But during much of this century deficits have been viewed as good, which follows from the economic theories of John Maynard Keynes. His views dominated economic thinking from the 1930s through the 1970s, and they state that deficits stimulate the economy. Thus when the economy went into recession, almost all economists have said that the government should run big deficits to help get the economy moving again.
Of course, not everyone adhered to this view. Many Republicans, for example, opposed the Kennedy tax cut and had to be dragged kicking and screaming to support the Reagan tax cut precisely because of their obsessive fear of deficits. Now the Democrats seem to have taken over the Republican paranoia, arguing that bigger and bigger surpluses are the key to prosperity, even though surpluses are viewed as depressing in the Keynesian model that they formerly used to justify deficits for 50 years.
A review of the academic literature finds virtually no evidence that deficits cause inflation and very little that they raise interest rates. Inflation, economists now generally accept, is caused exclusively by the Federal Reserve's monetary policy. Thus we have had rising prices when the deficit was low and falling prices when it was large.
The impact of deficits on interest rates is more ambiguous (see figure). Some studies show an impact, others show none. But even those that show an impact conclude that the effect is small. Consequently, the presumed beneficial effect of surpluses must be equally small.
There is no question that the Democrats' recent conversion to the religion of fiscal responsibility is insincere. The instant that the economy begins to slow they will go back to the Keynesian church of deficits-are-good. Republicans should understand while paying down the debt is not bad, it is not necessarily any guarantee of low inflation and interest rates. The truth is that the Federal Reserve has far more to say about both than anything Congress does.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 9, 1999.
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