The Inflation Crisis, and How to Resolve It

10

What Spending and Deficits Do Not Do

In the preceding chapter we have examined some of the harm that deficits do. Let us here concentrate on what they do not do. They do not cure unemployment.

Let us turn to segments of the historical record, year by year.

Sources: Budget of the United States, 1978, p. 437. Historical Supplement to Economic Indicators, 1967, p. 35.

After 1930, we had cheap money, inflexible or rising wage rates, and heavy government deficits for the next ten years. We also had mass unemployment for the next ten years—until World War II finally bailed us out.

In the foregoing tabulation, the deficits are for the fiscal years ending on June 30; the unemployment is an average of the full calendar year. These deficits may not seem large in comparison with the sums to which we have recently become accustomed, but they were not trivial in their time. As the average annual deficit for the period was $2.8 billion, and the average expenditure $6.7 billion, the deficits averaged 42 percent of total expenditures. Translated into other terms, the $2.8 billion average deficit was 3.6 percent of the gross national product of the period. The same percentage of the gross national product of 1976 would be equivalent to a deficit of $60.9 billion.

Now let us look at the record from 1960 through 1976.

3 Surplus.

Sources: Budget of the United States, 1978, p. 437. Economic Report of the President, January 1977, p. 221.

There are so many factors operating at all times in a national economy, and so many conditions, in particular, helping to determine the overall rate of employment or unemployment, that a simple statistical comparison like the foregoing does not prove anything beyond dispute. But on their face the figures hardly tend to show that deficits, even massive ones, prevent or even reduce unemployment. On the contrary, the clear trend is that the higher the deficits in the foregoing table, the worse the unemployment record.

The average unemployment in this country over a long period of years has been a shade under 5 percent. In the six years beginning 1971, when massive chronic deficits set in, the unemployment rate averaged 6.36 percent, and higher in the two years when the deficits were highest.

It is interesting that in the sixteen years following 1960, there was a surplus in only one year—1969—and in that year unemployment was the lowest shown in the table.

A coincidence, no doubt. But again, one of the worst consequences of the fixed Keynesian myth that deficit spending cures unemployment is not only that it promotes reckless government spending and monetary inflation, but that it systematically deflects attention from a study of the real causes of unemployment—excessive union wage rates, minimum wage laws, prolonged unemployment insurance, and a score of other social programs that diminish the incentives for men to accept market wages or to look for work.

• 1* Surplus.
• 2* Surplus.
• 3+   269*