President Reagan came under continuous criticism from Mrs. Thatcher and the heads of governments in several other countries because, for some years, the American Federal Government has been running a large budget deficit; that is to say it nas been spending more each year than its ordinary revenue from taxation and other sources, and making up the deficit by borrowing and thus adding to the national debt.
A second criticism levelled at Reagan was that America has a huge adverse trade balance, exports being insufficient to pay for imports, the deficit being met by loans from abroad. It is not intended to deal with this except to point to a difference between the two kinds of deficit. While it is possible for all governments in the world to run a budget surplus at the same time, it is not possible for all governments simultaneously to run a favourable trade balance. World imports and world exports are the same, one country's exports being another country's imports. The relative position of countries constantly alters: Japan now leads in respect of the size of its favourable balance: some twenty years ago it was the United States, with Japan showing a big trade deficit.
As regards criticism of the American budget deficit by the British and other governments. Tim Congdon in an article "Do these debts really matter?" (Times, November 1988) showed that many of the critics are not in a position to object, in view of the state of their own budgets. The American budget deficit in 1988 was an amount equal to 2.3 per cent of annual national income (Gross Domestic Product), which is less than the deficit in France (2.5 per cent), Germany (2.6 per cent), Canada (3.3 per cent) and Italy (10.2 per cent). The British government, too, has been running a budget deficit for many years, although the amount is less then the American 2.3 per cent of GDP and there is now a commitment to run a balanced budget or even a surplus in future.
The new President, George Bush, turns a deaf ear to the criticisms and intends, it appears, simply to wait in the hope that increased government revenue will wipe out the deficit by 1993, without any increase of taxes. The American House of Representatives' Budget Committee does not believe this and forecasts that the deficit will continue to increase and reach 50 billion dollars by that date (Times, 22 November).
The attitude of governments and economists to budget deficits has undergone a big change since last century both in the United States and Britain, partly because of the different view taken of borrowing. In the nineteenth century and the first half of the present century workers were strongly urged never to get into debt. It is all different today. The workers are under ceaseless pressure to “borrow now, pay later”. This changed attitude has helped to weaken the earlier attachment to the idea that normally Government budgets should be balanced and recourse to borrowing exceptional, as during war or for some large, longer-term government expenditure like expanding the navy.
In recent years, before Reagan's presidency, the tradition of a balanced budget had been re-established in the United States but it was certainly not observed by President Roosevelt during the depression of the 1930s. His government ran a huge deficit from 1933 to 1939 and continued to do so during the war. The Roosevelt “New Deal” signalled the conversion of most economists to the doctrines of J.M. Keynes, involving as it did a new look at budget deficits.
Before Keynes the usual reaction of governments to the onset of a depression was to meet the fall of tax revenue due to reduced incomes from profits and wages by cutting government expenditure and increasing the rates of tax — the aim being to maintain a balance between government revenue and expenditure without borrowing. The Keynesian remedy in a depression was the reverse — cut taxes, increase government expenditure by borrowing and run a big budget deficit.
Under Reagan's presidency unemployment has fallen below 6 per cent, the lowest for 14 years, and there are more workers in work than ever before in American history. As might be expected the Keynesians claim that this is proof that if the government spends more by borrowing and runs a budget deficit this will create more jobs and maintain full employment. It is wrong in theory and is not supported by experience. If a government spends more, whether it gets the additional money by taxation or by borrowing from investors, the inevitable consequence is that the taxpayer and investor spend correspondingly less. The true picture is that capitalism goes through a continuing cycle of depression, expansion, overproduction and depression irrespective of the budget or other policies of different governments. The abnormally low unemployment under the Attlee Labour Government 1945-1951 could not have been due to a Keynesian budget deficit policy because the government was running a budget surplus.
The best example of the irrelevance of Keynesian doctrine is to compare the Roosevelt “New Deal” with the way the British government dealt with the depression in the same years. Roosevelt's policy was Keynesian. The British government's policy was the reverse, that of cutting government expenditure and increasing taxation to aim at a balanced budget. In spite of opposite financial policies unemployment took much the same course in both countries. In the United States it rose from 8.9 per cent in 1930 to a peak of 25 per cent in 1933, and in 1938 — five years after Roosevelt became President — was still 19 per cent. In Britain it reached a peak of 22 per cent in 1932, and in 1938 was still 13.5 per cent.
The Labour Party's view of budget deficits is particularly interesting. They are committed to a big increase of government expenditure and a budget deficit in the belief that it will wipe out unemployment. Yet the last Labour Government, 1974-79, ran a big deficit and saw unemployment go up from about 600,000 to 1,300,000. Labour Party policy, laid down in a Report to 1944 conference had this to say: “If trade is bad or even showing signs of turning bad, then is the time for a budget deficit". In 1976 the Callaghan Labour Government threw the Keynesian doctrine overboard because he said it would cause inflation:
Continued inflation in the UK would lead to further hardship and unemployment. Therefore the Government rejected the panacea of pumping more funds into the consumers' hands so that the internal economy could be expanded (Times, November 1976).
What caused this repudiation was that two different Keynesian policies presented the government with an inescapable dilemma. One Keynesian doctrine is that the cure for inflation is to run a large budget surplus (see Harold Wilson's Remedies for Inflation, 1957. page 11). The other is that the cure for unemployment is a large budget deficit. But under the Labour Government between 1974 and 1976 unemployment and prices were both shooting up rapidly and there is no way in which the budget can be in surplus and deficit at the same time.
While governments have no control over unemployment — it takes its own course — they do have control over the general price level and can stabilise prices if they so decide, as in the nineteenth century up to 1914; or reduce them as in 1920 —1925: or push them up as Labour and Tory governments have chosen to do in the last half century. Why they have chosen to do this (or have slipped into it out of total ignorance of the monetary theories known to governments in the nineteenth century and in 1920-1925) is something of a mystery.
Reverting to the criticism made by other governments about the American budget deficit, the Times (8 November) says that their specific accusation is that it is "the prime cause of continuing international financial instability". We have news for them. As Marx showed, capitalism is an inherently unstable economic system and there is nothing governments can do to make it stable.
Edgar Hardcastle
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