How can this be? How is it possible for so many bright, well-intentioned people in the media, the government, and academia to pretend that a 5% increase in the annual deficit -- from $400 to $420 billion -- could initiate a long-term turnaround of the American economy? Would any competent CEO, brought in to turn around a company, start by attempting to convince his board and bankers that even deeper losses are the path to eventual recovery?
Of course not. But according to the received economic wisdom, the mundane requirements that discipline businesses and families -- like having to produce more than you consume -- simply do not apply to society as a whole. Consequently, whether Republicans or Democrats, the overwhelming majority of American economists agree that federal deficits are an essential tool of macroeconomic policy, not a red light warning of future calamity. Indeed, last spring when Congress nearly passed the Balanced Budget Amendment, 400 prominent economists, including seven Nobel laureates, argued against its approval.
Why such intense devotion to deficit spending? Because most economists honestly believe that deficits are good for us. Tragically, their reasoning grows out of fatally flawed, but almost universally shared, assumptions about what an economy is and how it works.
When The New York Times asks whether Bill Clinton can get the economic bulldozer moving again, the implicit assumption is that readers think the economy is like a bulldozer, a powerful engine whose internal mechanisms are fully understood and fairly easy to adjust. Economists and journalists incessantly use phrases like "jump start, "fine tune," "rev up," and "losing steam" to describe the economy. Even Ross Perot, who lambasted economists for their complicity in saddling us with a $4100 billion debt, relies on "economy as machine" jargon. "Let's raise the hood and go to work," said Perot in his first infomercial. "An engine tune-up ain't gonna to fix it. We're gonna to have to do a major overhaul."
Whether we admit it or not, our mindset, the way we comprehend complex problems, is shaped by the language we use to describe those problems. Thinking about the economy as if it were an engine inexorably leads us to policies that treat the economy like an engine. For example, having accepted the "economy as machine" metaphor, they quite reasonably conclude that the government's proper role is to stomp on the gas pedal whenever the economy slows down. Deficit spending is the "gasoline" that keeps the engine running full tilt, generating jobs, and output. And, according to this basic logic -- first formulated in the 1930s by John Maynard Keynes -- without government's foot on the fiscal accelerator, society's natural demand for goods and services cannot keep the economic engine cruising at full speed.
Though many believe that federal deficits began with Ronald Reagan, the data clearly show that the trend of increasing federal deficits began 32 years ago, when John F. Kennedy put the first generation of Keynes' disciples into policy-making jobs. Prior to the 1960s, balancing the federal budget, though not a Constitutional mandate, was regarded as a near-sacred duty by every president and Congress. It was an obligation excused only in time of war. But once the Keynesians took charge of the policy-making apparatus, budget balancing was discarded as a quaint relic of an era before modern economics.
Even under Reagan, when the talk was all "supply-side," the reality was burgeoning deficits and unprecedented levels of Keynesian "demand-side" stimulus. Today, the explosion of federal spending is still driven by entitlement programs, many put in place under Lyndon Johnson's "Great Society." Though the Keynesians never endorsed deficit spending during periods of vigorous growth, by discarding the balanced budget concept as obsolete, they gave the politicians official permission to promise benefits without raising the taxes to pay for them. And once granted, those benefits proved impossible to curtail even in boom times.
Over the last three decades, Keynesian "stimulus through deficits" has utterly corrupted our political life. In the old balanced budget era, if a Congressman wanted to bring some "pork" home to his district, he first had to wrestle it away from his colleagues. Politicians who came up empty-handed in this zero-sum game often found themselves turned out by the voters.
But under the "no limit" rules of the Keynesian game, the struggle for pork virtually disappeared. Simply by boosting the deficit, every Congressman could be a hero back home. No matter how outrageous or wasteful a program might be, if it helped a special interest that had campaign money to hand out, the program's cost could be easily tacked onto the ballooning deficit. With the blessing of America's top economists, our democracy fell into the Keynesian black hole, where politicians trade government hand-outs for campaign contributions. In the early sixties, less than one-fourth of Americans believed the government was controlled by special interests. Today, polls show over 80% believe special interests run the show.
And yet, despite the outcry over rampant corruption and runaway debt, no analysis ever seems to identify the ultimate source of these problems, because no one challenges the "economy as engine" analogy underlying Keynesian thinking. No matter how disgusted you may be with Washington's shenanigans, as long as you're willing to believe the economy is a machine, it makes perfect sense to support yet another shot of high octane fuel.
Of course, not everyone believes in the machine myth. As regular readers of this column know, bionomics sees the economy not as an engine, but as a living social organism. From a bionomic perspective, a deficit is not gasoline pumped into the economy's carburetor but amphetamine pumped into its veins. With each passing year, the economy's tolerance for the deficit drug grows, and ever larger doses are needed. Today, even massive $400 billion injections seem to have no effect. Flat on its back, exhausted by decades of overstimulation, today's economy is like a pathetic, strung-out speed freak who keeps begging for "just one more fix."
Making matters still worse, the cash the federal government borrows from investors would -- in the absence of the federal deficit -- be invested in new technologies and business expansion -- precisely the activities that generate good jobs and higher output over the long run. The "speed" which pumps up our economy does not come from somewhere outside the system. It is wealth that we are siphoning from the future by turning long-term investment into current consumption. Today, over two-thirds of our annual national savings is absorbed by the deficit. The one-third that's left over cannot sustain a world-class, high-tech economy.
In the weeks ahead, as our new President gathers the reins of power, he may want to re-read his campaign promises of "real change." And if Bill Clinton is serious about turning the American economy around, he must lay out a four-year recovery plan that gradually weans our addicted economy from its Keynes' drugs. Withdrawal is always painful, but the alternative is far worse.
Tragically, that alternative is our most likely path. Clinton's closest economic advisors, like those who have advised every president since Kennedy, remain faithful to the Keynesian creed. For the next few years, we can expect repeated calls for "just one more fix." But sometime in the mid-1990s, probably about the time our cumulative debt load exceeds our GDP, our addicted economy will collapse.
Real long-term interest rates, already near all-time highs, will be driven skyward by the insatiable cash needs of the federal government. Hurdle rates for business investments will rise to the point where almost no capital purchases can be justified. And as capital goods industries and their jobs shrivel, overall consumption will plummet. Ultimately, the unthinkable will become unavoidable, and like so many of history's great powers, the United States will be forced to repudiate its debt, and millions of Americans holding government bonds will see their wealth wiped out.
None of this has to happen. In his first hundred days, Bill Clinton will have a one-time chance to "just say no" to more Keynesian drugs. By putting forth a credible deficit elimination schedule, he could reverse the bond market's psychology, lower long-term interest rates, boost consumer confidence, and launch a genuine, sustainable recovery. But first, Bill Clinton must understand that he's nursing a burned-out junkie, not driving an out-of-gas bulldozer.