Blue Monster 65 wrote:I would have to say I believe in cutting spending and lowering taxes. Mind you, in a war situation, I believe in both cutting spending and raising taxes! But that requires belt-tightening on the part of the public and a close eye on war profiteering, which we are NOT doing.
OK, so in the non-war situation that prevailed for most of the 1980s (unless we count the cold war), you would have preferred that both taxation and spending (set at the same level, to eliminate the deficit) would be lower than the level of taxation actually was during this period? That would be a significant reduction in government spending, which unquestionably has a direct effect on the real economy. I think it is completely non-controversial that things would have been different in that scenario.
What is more debatable is whether, holding a level of spending fixed, the manner in which one finances the spending (through current taxation, or through a deficit, which is effectively future taxation) matters in a significant way. So if we have three scenarios:
A: Government spends $100, taxes $80, runs deficit of $20.
B: Government spends $100, taxes $100, runs deficit of $0.
C: Government spends $80, taxes $80, runs deficit of $0.
Nobody questions that scenario C has different implications than A and B. What people disagree on is whether the implications of A and B are all that different.
We could consider the two extremes of how the public may react to the deficit in Scenario A, which we can call A1 and A2:
A1: If, in scenario A, the public saves $20 more than they would have in scenario B, and lends it to the government, then in the future, the government pays back the $20 (plus interest) with one hand, but reclaims it in taxes with the other. In this case, the effect of the deficit in scenario A (relative to scenario B - nobody questions that it's different than scenario C) would be absolutely nothing on anything. Everyone knows that because the government has already spent that $20, they're going to come for it one day, and they set it aside (and in fact lend it to the government to finance the deficit). The difference between scenario A and B is then that in Scenario A, the public has a piece of paper from the government that says "I owe you $20", but they know it is not for real, since the government will tax them to pay off the debt. So the net effect of the deficit is zero.
A2: If, on the other hand, the public reacts to the $20 tax cut they receive in Scenario A (relative to Scenario B) by saying, wow, our taxes are lower, let's have a $20 party, not worrying about the fact they will eventually get taxed $20 to pay off the government debt, then this will have all kinds of effects. Private consumption will be $20 higher, and private savings/investment will be $20 lower (since $20 that was available for private investment is now borrowed by the government instead). Here, there are clear differences in the real economy, depending on whether government spending is financed through current taxation, or through borrowing, and these differences occur because the public does not rationally anticipate that their taxes will be higher in the future, and save money so they can pay them.
So the million dollar question is, does the public act more like Scenario A1, or more like A2? In the usual favored macroeconomics of the political left, they act like A2 (deficits matter), the newer macroeconomic school more commonly associated with the political right has a public that acts more like A1 (deficits don't matter). It seems like this should be a question of fact that can easily be answered by looking at the world, but this is one of the difficult things about a field like economics; it's not a laboratory science, where you can change one variable and observe its effects. All you get to see is the evolution of the real economy, in which many many variables are all changing at the same time, and it can be quite difficult to disentangle their effects.
Although I draw a link between the two schools of macroeconomic thought and political orientation in the previous paragraph, this association is messy, imperfect, and politicians are often grossly inconsistent on this point. To wit, the tax cuts of GWB's first term were partly sold as stimulative (economy slowed through much of 2000 and tipped into recession right about the changing of the guard). If you argue that tax cuts (holding sending fixed) stimulate the economy, then you have to believe in scenario A2. If you believe in scenario A1, then the public will not increase their consumption. But it's talking out of both sides of the mouth to say that you can use a deficit to bring the economy out of recession (a move straight out of the playbook of John Maynard Keynes, and one that would normally be associated with leftish politics, but here on offer by GWB), and then to argue that the accumulated debt has no effect. Well, you can argue one way or the other with a straight face, but not both - they're inconsistent.
The traditional Keynesian macroeconomics (born of the great depression, which according to classical macroeconomics couldn't happen) has in its toolkit the idea of running a deficit to stimulate the economy during slow times, and then paying off the accumulated debt during the good times. This is often misinterpreted by politicians and the public alike to mean that the government should always run a deficit to stimulate the economy. That doesn't work, Keynes' idea was that you could smooth out economic cycles this way, not permanently up the rate of growth through deficit spending. Franklin Delano Roosevelt practiced this with zeal, although there are debates about whether the New Deal programs were really carried out on a big enough scale to make much of a difference. Keynesian macroeconomics is more typically associated with the political left, but, as noted above, GWB often borrows from this playbook, as do many other politicians who are usually thought of as conservative. At the heart of Keynes' thinking here is the idea that people behave as in scenario A2. If they act like A1, then Keynes' ideas don't work.
Neoclassical macroeconomics is the newer school, and tries to repair classical economics so that extended global depressions (not possible in the original version) can occur, spurred by the observation that one actually did occur. It is usually associated with the political right, but not always - see above. The neoclassical assumption will normally be that people behave as in A1, and, holding spending fixed, deficits ought not to matter. Many more rightist politicians don't seem to grasp this though; in the US, "cut taxes" seems to be the mantra of the right, but if you don't cut spending as well, all it means is that you have to raise taxes in the future. So I think many rightist politicians haven't read their own playbook.
I would also say that the current deficit is helping devalue our dollar against other currencies, thereby helping push us further into recession.
Agh, I'm getting tired here :P Let me just say in a grossly oversimplified way that you might expect a weakened currency if you believe in scenario A2, although it depends on other things as well. But why does weak currency push you into recession? It makes imports more expensive, and exports less expensive (to the people in the other country). A country whose currency has weakened should find products manufactured in its country are more competitive against foreign products both inside and outside the country.
The US economy is not currently in recession, although there are some warning signs that there may be one soon. But one of the longest economic expansions of recent history (of the 1980s) occurred through a period of sustained deficits. The only one in recent history that was longer (of the 1990s) came to an end not long after the budget was brought into balance :P
But, generally, you have to be very careful analyzing these questions. The value of the currency is determined in a market, in which forces of supply and demand operate. The currency can become weak because of changes in its supply, or in its demand. The effects of a weakening due to changes in supply can be different than one due to changes in demand. This phenomenon goes under the heading of "endogeneity," and can easily lead one astray, but in fairness, it took economists many years to figure this one out themselves :P
but from the articles I'm reading, our weak dollar - partially the result of our massive deficit - is leading to much less spending power for us.
The weak dollar does make things purchased from other countries more expensive, but that's different than pushing the economy into recession.
I guess I could go on, but I've probably already written more than anyone wants to read :(