WILLIAM S. VICKREY We Need a Bigger “Deficit"

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WILLIAM S. VICKREY

We Need a Bigger “Deficit"

The So-Called "Deficit"

We are not going to get out of the economic doldrums as long as we continue to

be obsessed with the unreasoned ideological goal of reducing the s0-called deficit.

The "deficit" is not an economic sin but an economic necessity.

Its most important function is to be the means whereby purchasing power

not spent on consumption, or recycled into income by the private creation of

net capital, is recycled into purchasing power by government borrowing and

spending. Purchasing power not so recycled becomes nonpurchase, nonsales,

nonproduction, and unemployment.

A Private-Capital Approach to Full Employment

We have not had a satisfactory approach to full employment, except in war-

time, since 1926. Over much of this century, trends in the ratio of profitable

private capital to national product have been downward, as a result of capi-

tal-saving innovation such as fiber optics, the trend to light industry away

from steel mills and other heavy industry, and the increasing importance of

services. Prospects are that for the foreseeable future the capacity of private

industry to find profitable use for private capital will be not much greater

than two years of gross domestic product.

On the other hand, aspirations of individuals to acquire assets to provide

for retirement and other purposes have been growing, due to longer life ex-

pectancy, higher retirement aspiration levels, the loosening of family ties,

the development of expensive medical technologies, and other factors. Cur-

rent aspirations appear to be moving toward three years or more of gross

domestic product. This leaves a gap to be filled by government debt of about

one year of gross domestic product.

The author last worked on this chapter in August 1993. It is being published post-

humously and reflects the incomplete nature of the original manuscript.

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Full Employment and Price Stability 135

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WILLIAM S. VICKREY

Government Debt to Fill the Gap the Private Sector

Cannot Fill

If we aspire to a satisfactory level of full employment by 1998, whereby

anyone not too finicky about the type of work could find a job at a living

wage within 48 hours, this will, if we assume inflation to average about 3

percent, call for a gross domestic product of about 10 trillion dollars. To fill

the gap between the asset aspirations of individuals at this level of income

and the ability of the private sector to provide assets, the supply of govern-

ment securities would have to rise to 10 trillion dollars, implying a level of

income recycling by governments of about 1 trillion a year on the average

over the next five years.

Paying for the Debt that Fills the Gap

Once this level is reached, to continue in equilibrium, the supply of govern-

ment securities will need to grow pari passu with the gross domestic prod-

uct, to correspond to the gap between the demand of the population for assets

and the provision of assets by the private sector. Whatever interest charges

on the debt are not financed out of this growth in the debt can more than be

met out of savings in unemployment insurance payments, and the increased

tax revenues derived from the larger national product at rates no greater than

at present. A 10 trillion debt with a full-employment economy will be far

easier to deal with than a 5 trillion debt with an economy in the doldrums.

What if the Gap Is Not Filled?

If governments fail to fill the gap and meet the demand for assets by issuing

an adequate volume of securities, the attempt by individuals to acquire as-

sets by nonspending will cause a reduction in sales, temporary investment in

excess inventories, cutbacks in orders, unemployment, and reduced national

income and product. This may be partially offset by the bidding up of asset

values, leading to a certain amount of additional spending out of capital gains,

but the "saving" imbedded in these capital gains does not involve the cre-

ation of new capital or the employment of individuals in construction. The

reduction in interest rates could in principle increase “deepening" types of

investment in labor-saving technology, but after the initial stimulus, the ef-

fect on employment tends to be negative. Little "widening" investment is

likely to take place regardless of reduced interest rates if the market for the

product is not there. There is a serious danger that the bidding up of asset

prices could create a bubble of unsustainable values that is likely to collapse

disastrously, as occurred in 1929 after the budget surpluses of the preceding

years. Sooner or later a reduction in production and national income will set

in until the reduction in income reduces the demand for assets to conform to

the supply.

Tangible Real Effects

Reducing the "deficit" may reduce the debt of the government, but it also

reduces the supply of assets people want to acquire to take care of their

security needs. Reducing the "deficit" does not improve the real heritage left

for the future, rather it impairs that heritage by leaving a legacy of inexperi-

enced workers, impaired infrastructure, and reduced investment in plants

because of reduced demand for the products, to say nothing of the impact of

unemployment on health, delinquency, crime, and broken homes.

The "deficit" is not even calculated on a businesslike basis. It makes no

distinction between current account and capital account items. If GM, AT&T,

and the nation's households had been compelled to "balance their budget"

calculated in the way the federal budget is calculated, we would now have

many fewer automobiles, telephones, and houses.

Individual Saving (Absent Strong Demand) Is

Counterproductive

Urging individuals to save more is counterproductive. Individual saving does

not mean that funds are created out of thin air to put into savings accounts or

the capital market. For most individuals, savings is nonspending, which be-

comes the nonincome and reduced savings of the vendor. Funds are trans-

ferred from the bank account of the vendor to the account of the saver, there

is no increase in total money in the bank, and no facilitation of investment,

while reduced market demand will actually discourage investment. Savings

are neither a prerequisite nor an inducement for investment. Rather,

nonspending by reducing market demand lowers incentives to invest.

Profitable Investment and Saving

On the other hand, if a businessman can show good prospects for profitable

investment, he can nearly always get credit and proceed with the investment,

which will constitute an increase in someone's wealth, which is ipso facto

savings. Supply does not create its own demand as soon as some of the

income generated is saved, but investment does create its own savings,

and more.

Full Employment and Price Stability 137

192 WILLIAM S. VICKREY

Inflation and Full Employment

Eventually, in all likelihood, we will have to find some way of dealing with

the threat of an unacceptably high rate of inflation that does not involve the

maintenance of what Marxists used to call "the reserve army of the unem-

ployed." For the moment, however, that threat seems sufficiently remote

that we could proceed with the first steps toward full employment and deal

with that bridge when we come to it. There has been no dearth of plans for

controlling inflation in ways that preserve the essence of free markets.

We Have the Resources but Refrain from Using Them

The administration is trying to bring the Titanic into harbor with a canoe

paddle, while Congress is arguing

and the Perots and budget balancers seem eager to lash the helm hard-a-

starboard toward the iceberg. Some of the argument seems to be over which

foot is the better one to shoot ourselves in. We have the resources, in terms of

idle manpower and idle plants, to do so much, while the preachers of auster-

ity, most of whom are in little danger of themselves suffering any serious

consequences, keep telling us to tighten our belts and refrain from using the

resources that lie idle all around us.

whether to use an oar or a paddle,

Alexander Hamilton, William Jennings Bryan

Alexander Hamilton once wrote “A national debt, if it be not excessive, would

be for us a national treasure." William Jennings Bryan used to declaim, “You

shall not crucify mankind upon a cross of gold." Today's cross is not made of

gold, but is concocted of a web of obfuscatory financial rectitude from which

human values have been expunged.