An almost forgotten economic theory, vanquished long ago by the Keynesians, has been resurrected in Washington. Old-timers remember it as "the (British) Treasury view." It states that deficits drive the economy down because they impair confidence. Over the past few months "the Treasury view" has elbowed aside the monetarists and the supply-siders along with its Keynesian conquerors and taken over policy-making in Washington.
Keynes laid the responsibility for the Great Depression at the feet of this theory, because it calls for reducing demand during recession in order to fight deficits. Yet the remnants of his once-proud disciples are strangely silent as an unholy alliance of senators and administration officials threatens once again to respond to recession deficits by tightening the economy's belt. Indeed, Keynesians are egging on the process of treating a faltering economy with austerity, a process they once likened to treating a loss of blood by bleeding the patient.
Recently I testified before the House Ways and Means Committee. On the panel that was testifying it were several notorious Keynesians, one--Paul Samuelson--crowned a Nobel laureate. As I listened to him excoriate the Reagan administration for bringing the ruin of deficits upon the country, I could not fight off the vision of this distinguished economist at work at his desk turning the pages of his multi-editioned textbook, which taught the virtues of deficits to the postwar generations, and stamping them "canceled." What was going on? Why all of a sudden were financial market participants panicked by budget deficits? All of them were born to budget deficits. Not only were they educated by Samuelson's text or its imitations, but the financial markets have known no other experience than budget deficits for the last 20 years.
As I listened to Samuelson warn the committee about the deficits caused by the tax cuts, it suddenly clicked, and the hidden agenda was revealed. It wasn't the deficits that disturbed him; it was the tax cuts.
The Keynesian revolution enshrined budget deficits as the primary policy tool for maintaining a growing economy and full employment. Strictly speaking, a tax cut is a legitimate Keynesian tool, and Keynesians themselves once employed it "to get the economy moving again."
But there was another facet to the Keynesian revolution --the Galbraithian one that stressed the dearth of public goods: there was an abundance of private goods-- things like tail-fins--but nowhere near enough of the things we really needed, which only government could provide. Tax cuts could fuel the capitalist economy along, but they would allocate the society's resources into selfish and wasteful private goods serving ego needs manufactured by Madison Avenue. Deficits caused by increases in government spending programs, however, would permit the expansion of the public sector. They would also buy a lot of votes, and the policy was off and running.
That's why the personal income tax cuts have few friends in Washington. They threaten the expansion of the public sector and the vote-buying game that politics has become. That's why politicians and economists, who have reassured us so often of the palliative effects of budget deficits, now see disaster in the third-year tax cut.
Why else would they be going on about something as ordinary as a budget deficit, especially in 1983, a year of economic recovery? If anything, the deficit projected for 1983, at 3.1 percent of GNP, is smaller than normal recovery-year deficits of late. In 1976, when the economy was recovering from the 1974-75 recession, the deficit measured 4.5 percent of GNP. And in spite of (Keynesians would have said because of) the larger deficit, that recovery was stronger than the "rosy" one that the Reagan administration is predicting.
The deficit hysteria is a cover for wrecking the tax cuts and getting on with the business of government spending. The same politicians who are wringing their hands over the deficit are voting funding increases billions of dollars above the president's budget.
Maybe that's why the Keynesians are not protesting the resurrection of "the Treasury view." Let this old ghost scare away the timid tax-cutters, and soon government will be back to fighting recession with deficit spending. Keynesians don't really want to treat the whole economy with austerity, only the private sector.