Spending Money To Make Money
The Creators of Today's Deficit Spending By Design
President-elect Obama recently announced that his administration will work with the US Congress and introduce economic initiatives that will pump government funds into the US economy through various programs over the next four years to stave off what many economists believe will otherwise be an economic collapse. The total budget deficit from these efforts may approach or exceed one trillion dollars. Deliberations surrounding this issue usually does not focus on whether the Federal government should be using public funds for this but instead consists only of how much of an infusion of cash from the US Treasury is necessary to shore up the shaky economy.
Limitations of Capitalism
This apparent presupposition on the part of the present and incoming administrations that it is the Federal government's role to backstop a faltering economy through macroeconomic initiatives has historical roots from Franklin Roosevelt's presidency. Alan Brinkley in his book, The End of Reform, relates that many politicians and economists in the 1930's came to the conclusion there were limits to the capacity of industrial economies alone to create enough wealth to satisfy the needs for all citizens. Many policymakers also assumed that America's economic woes were based in a weakness of capitalism that allowed for the continued centralization of economic power and its inherent resistance to distribute wealth.
Keynes' Economic Principles
Brinkley writes that these "liberal" attitudes in academia and government led to policies during the FDR years that sought to decentralize the centers of economic power and use government action as the macroeconomic vehicle for the redistribution of wealth and income. Chief among the intellectuals providing the architecture for these initiatives was a British economist named John Maynard Keynes.
Keynes' ideas would later become solidified as a model referred to as "Keynesian economics" and promulgated the concept that governments must step in and stimulate economic vitality when private markets faltered. Central to Keynesian principles at the time was the belief that economic depressions should be mitigated and not accepted as normal market fluctuations through the injection of capital at the government's expense, even if this meant deficit spending.
Alvin Hansen, "The American Keynes"
Now enter Alvin Hansen, the Harvard economist and author of Full Recovery or Stagnation (1938) which was based, in part, on Keynes' earlier work, The General Theory of Employment, Interest and Money (1936). Hansen put forth the concept that without the involvement of government, mature economies, such as the US, would experience a "stagnation" of employment and continued erosion of economic strength. Deficit spending by government was worth the return in "full employment" of the workforce, resulting in an enlarged economic output that, in turn, led to increased consumption and the stabilization of prices and incomes. For Hansen, this meant that governments would spend the most when revenues are lowest but the results were more desirable and beneficial than a balanced budget.
Hansen served as a consultant to several federal agencies and New Deal initiatives as well as providing testimony to Congress. As such, he had an influence on the formation of policies and legislation, such as the Social Security Act.
Public Debt vs. Personal Debt
According to the Office of Managment and Budget (OMB), the Federal budget remained balanced throughout much of the nation's first 200 years, with the exception of times of war or economic strife. During this period, classical principles of economics dictated that governments should strive to conduct their affairs so that expenditures did not exceed revenue, just as in personal finance. Hansen dispensed with the notion that governments should balance their books. He did not equate personal debt with public debt. Since the Federal government had the power to print money, it was only borrowing from itself when operating in a deficit.
A Legacy of Spending
Historians and economists still debate the efficacy of Keynesian economic initiatives undertaken during the FDR years to alleviate the conditions of the Great Depression. It was during this time that Keynes, Hansen and other economists put forth the idea that deficit spending by governments as a matter of policy, and not simply of necessity, can have a long term benefit to the health of economies. The Bush administration and by all indications, President-elect Obama are adopting Keynesian principles with that in mind.
While deficit spending by the Federal government is not without precedent, the difference today is one of scale. The American budget today and in the forseeable future will operate with unprecedented deficits resulting in heretofore unbelievable amounts of public debt. Keynes and Hansen will either be vindicated or the magnitude and complexity of the globalized economic problem will call for new ideas and solutions.
Strapped Currency
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