Debate
Do Deficits Matter?
Yes, and Republicans should use process reform to tackle them. by M A R C J O F F E Although fiscal austerity has been dismissed as “old- double-digit inflation followed. After fiscal and price stability returned in the school” in recent years, history shows that the alternative— Eisenhower and Kennedy years, President Lyndon fiscal profligacy—brings dangers, which often manifest Johnson’s guns and butter budgeting spiked federal themselves years or even decades later. Rather than deficits and touched off an inflationary spiral that became tempt fate, Republicans should rediscover their fiscally especially pronounced during the 1970s. Federal Reserve responsible heritage and develop modern policies to limit Chairman Paul Volcker, with the support of President waste and reduce the risk of future financial calamity. Reagan, greatly reduced inflationary pressure by sharply Under Democratic President Woodrow Wilson, raising interest rates, triggering a deep recession in the the national debt ballooned from $3 billion in 1913 early 1980s. to $26 billion ahead of the 1920 Unfortunately, some recent Presidential election. Fed up with Republican leaders have lost touch war, recession, tax increases, and with the party’s fiscally conservative government mismanagement under legacy. President George W. Bush Wilson, voters gave Republicans a did not match tax cuts with spending landslide victory in that election. reductions, while placing two armed A major Republican reform th conflicts and a Medicare prescription enacted by the 67 Congress was drug entitlement on the nation’s the Budget and Accounting Act of credit card. Under President Donald 1921 – the successor to a bill vetoed Trump, deficits were rising even by Wilson in 1920. This measure before COVID-19 struck, despite a created what is now the Office of strong economy. Management and Budget and the Today, we are in a situation Government Accountability Office, that has some parallels to the early implementing the annual budget th 20 century. We once again have a process and centralizing federal Marc Joffe potentially crushing debt burden. auditing. The only reason that debt service Better financial management is not crowding out other spending and a strong economy led to a steep priorities is that interest rates are reduction in the national debt during Republicans should being held well below historical the 1920s, but the residual debt rediscover their fiscally norms. To avoid the normalization limited federal fiscal flexibility at responsible heritage and of interest rates, the Federal Reserve the outset of the Great Depression. By the early 1930s, interest on the develop modern policies is obliged to monetize federal debt thereby exacerbating inflation. debt consumed about 30% of federal to limit waste and Although we do not know revenues, crowding out other types whether the rapid consumer price of spending and acting as a barrier reduce the risk of future increases of recent months will to tax reductions. Franklin Delano financial calamity. continue, we do know that inflation Roosevelt restored America’s fiscal in some form has remained with us flexibility through default: devaluing even after the Volcker tightening. the dollar and denying Treasury Instead of consumer goods registering steady price bondholders the option to receive payment in gold. th increases, inflation has continued to be an issue in Later in the 20 century, growing federal debt led education, healthcare, home prices and other asset to further disruptions. Debt monetization during World valuations. So, despite CPI changes of 2% or less in most War II was suppressed through federal price controls, recent years, many costs have continued to escalate faster, exacerbating shortages of many consumer goods. When (cont’d on p. 14) the price controls were finally released, a short period of 12
RIPON FORUM July 2021
