North Kingstown’s Mark Zaccaria, active small businessman and Republican Party Second District Congressional Candidate in 2008, has taken up the challenge of expounding upon Bruce Bartlett’s basic view of why deficit spending is needed now. Mr. Bartlett has said that…

I do not believe that budget deficits are inherently stimulative. However, when we are in a liquidity trap, as we were in the 1930s and I believe we are today, deficits are essential to make monetary policy effective. Monetary policy provides the real stimulus. But it doesn’t work when interest rates are close to zero.

Mr. Zaccaria responds…
When asked to fill in the blanks regarding deficits, monetary policy, and interest rates that were left by no less a person than Bruce Bartlett, a respondent is probably guilty of one of two sins. Any otherwise normal mortal taking up that challenge can probably be charged with either a colossal excess of ego or an other-worldly level of naïveté. I will plead guilty to the latter and leave it to you to indict on the former.
Actually, naïveté can be spun as a strength in any economic argument where numbers in the trillions are being tossed around. Naïveté, by its uncomplicated nature, simplifies all fractions and reduces all proofs to their most elemental form. So here goes.
Bartlett is correct when he states that federal deficits, in and of themselves, are not inherently inflationary. If the government runs a trillion-dollar deficit it certainly gets to buy more than it would have just sticking to income from tax revenues. No doubt there will be instances of suppliers raising prices because they can. But where does that trillion come from? It is sucked out of the private sector where it would otherwise be spent by you and me. If Inflation is too many dollars chasing too few commodities then the deficit, alone, won’t do that. For every dollar the government spends in deficit there’s a dollar forcibly extracted from the private sector. Net change in the Money Supply: Zero.
Deficits are bad, of course, but the reason they are is that they crowd out private investment. The private sector is much more likely to make its spending decisions based on the potential for profit. The government must make spending decisions on the basis of political imperatives. The government almost always makes buying decisions that are inefficient, at best, in terms of profit or the creation of wealth. Don’t react with righteous indignation to that term — another expression for it is gross domestic product.
The private sector only makes inefficient buying decisions some of the time.
Treasury bonds have a stronger guarantee than the bonds of a Fortune 500 Company. So treasury bonds commonly attract capital to inefficient deficit spending, thus preventing it from being used to increase productivity through new infrastructure or new R&D.
So if everyone agrees that deficits are bad, how do we get rid of them? Some politicians try to paint themselves as mature and responsible when they propose additional taxation as a means to bring in cash to cut the deficit. Nice try. Those additional taxes will just go to support the inefficient spending spree the government is on. At least with treasury bonds someone gets some sort of a return on their investment. The money you pay out in taxes is just gone.
Increasing taxes to cut the deficit has the same bad effect as allowing the deficit to begin with, except that you and I don’t even get dinner and a movie first.
The way to cut the deficit is to cut spending. Period.
Fine, but what about the Global Economic Meltdown currently in progress? Shouldn’t the government ‘do’ something to make it better? Agreed. But doing the wrong thing may be far worse than doing nothing at all.
Bartlett claims that the key failure of the Roosevelt Administration in the Great Depression was that they didn’t do enough deficit spending. He suggests that FDR should have spent whatever it took to offset the gap between potential productivity and the much lower rate of actual productivity. He may be right. America in 1929 was a far different place than the America we live in, in 2009.
During the Great Depression we had a virtually all cash society. If you didn’t have the money in your pocket to buy something you went without it. In that environment you can see where any new cash injected would have resulted in new spending. Today, though, we live in a nation and a world with a tremendous amount of accumulated debt. Today’s found money will not go to additional consumer spending. It will go instead to paying off old debt that’s already on the books. And there’s enough of that to suck up more deficit spending by the government than even the Obama Administration has ever fantasized about.
Remember what we just decided, above: deficits are bad, and most especially when the country is as far in the hole as we find America today.
The problems we face today are problems of monetary policy. The overly aggressive moves by the US Federal Reserve Corporation and other central banks to lower interest rates have fought the demon of Inflation so successfully that they have decreased the Velocity of capital to near zero. Today money isn’t moving. Having the Federal Reserve Corporation print lots more of it won’t get it moving, it will just set the stage for real inflation later by bloating the Money Supply. (Remember: Too Many Dollars Chasing Too Few Things to Buy)
We need to get the money we’ve already got moving again. If we simply dump a lot of deficit dollars into the pool today we will buy ourselves some infrastructure goodies and a whole lot of new government bureaucracy but little, if any help will be provided to average citizens. And when we’ve spent all those deficit dollars? We will be right back to where we are today, but with a much bigger national credit card balance.
In his piece on the subject former US Treasury official and Regan White House staffer Bruce Bartlett calls a number of current GOP Senators to task for asserting that the New Deal did not end the Great Depression, World War II did. Bartlett’s problem with that position is that during WWII the US Deficit climbed to levels something like 20% of GDP, and that it was all that deficit spending that did it.
While Bartlett’s facts are straight his analysis of them misses one important point, in my naïve opinion. During the 1930’s what federal deficit spending that was done was used to fund WPA, and CCC, and a number of other Alphabet Soup programs to put people to work on the federal payroll. Those people largely produced things that no private company ever would have. Thus the deficit spending of the 30’s took resources away from the productive economy.
During the War the money was spent on the all-out industrial production of goods and services. Perhaps the federal shopping list was tilted heavily towards guns and ammunition, but it also included vehicles, foodstuffs aplenty, clothing, tools of all types, and huge orders for durable goods. During WWII the federal government created industries with its deficits, not just spending programs.
Rule #1: Manufacturing is the only way to Create Wealth
To continue the astonishing, historic increases in the worldwide Standards of Living that were triggered by the emergence of American industrial production we have to keep making things. And just producing something is not enough (as General Motors is now learning). The product has to be something people will buy. The product has to be something that performs a needed task fairer, faster, funnier, or at a lower cost than whatever’s out there now. So it takes more than just factories. It takes new product definitions and the engineering muscle to make those ideas into actual hardware (or, these days, software).
Coming in Part 2: “So here’s the medicine…”
Mark Zaccaria is a small businessman in North Kingstown. He is a former member of the North Kingstown Town Council and was the Republican Candidate for the state’s District 2 seat in Congress in 2008.