This budget, in relation to the great problems of Federal fiscal policy which are basic to our economy in 1962, is not simply irrelevant; it can be actively misleading. And yet there is a mythology that measures all of our national soundness or unsoundness on the single simple basis of this same annual administrative budget. If our Federal budget is to serve not the debate but the country, we must and will find ways of clarifying this area of discourse.
Still in the area of fiscal policy, let me say a word about deficits. The myth persists that Federal deficits create inflation and budget surpluses prevent it. Yet sizeable budget surpluses after the war did not prevent inflation, and persistent deficits for the last several years have not upset our basic price stability. Obviously deficits are sometimes dangerous—and so are surpluses. But honest assessment plainly requires a more sophisticated view than the old and automatic cliche that deficits automatically bring inflation.
There are myths also about our public debt. It is widely supposed that this debt is growing at a dangerously rapid rate. In fact, both the debt per person and the debt as a proportion of our gross national product have declined sharply since the Second World War. In absolute terms the national debt since the end of World War II has increased only 8 percent, while private debt was increasing 305 percent, and the debts of State and local governments—on whom people frequently suggest we should place additional burdens—the debts of State and local governments have increased 378 percent. Moreover, debts, public and private, are neither good nor bad, in and of themselves. Borrowing can lead to over-extension and collapse—but it can also lead to expansion and strength. There is no single, simple slogan in this field that we can trust.
Finally, I come to the problem of confidence. Confidence is a matter of myth and also a matter of truth—and this time let me take the truth of the matter first.
So, it is a surprise to many economists that the discussion we are having right now – especially in Europe – have such clear precedents. However, the field of economic history is not taught anymore in German universities and therefore students cannot learn from the mistakes from the past. JFK was right: in a modern monetary economy with sovereign money ‘[b]orrowing can lead to over-extension and collapse—but it can also lead to expansion and strength’. Whether to increase government spending or not depends on the whole economic situation. Living in Germany and being part of academia I would not have thought so. Here is Dennis Snower, president of the famous (only in Germany, really) Kiel Institute for the World Economy (quote from NYT in 2012):
“Governments spend too much in good times, and they spend even more in bad times,” said Dennis J. Snower, president of the Institute for the World Economy in Kiel, Germany. “To have some constraints is a good idea.”
Meanwhile, Bundesbank president Jens Weidmann is travelling through Europe warning against public debt. I cannot remember any warnings from Bundesbank about private debt in Spain, Ireland or the Netherlands during the boom and before Mr Weidmann took over. If economics is a science but economists are not allowed to discuss public debt in any other way than saying that it’s bad, isn’t that called a taboo – and wasn’t science the weapon to erase taboos from society in order to create a society based on the best ideas that we have about reality and how to change it? Coming back to JFK, it seems to be clear that we have an intellectual problem here. Those in power today are clearly not grasping how an economy works. Reading JFK provides hope that politicians in the future – probably not those of the present – might be saying sensible things about the economy again.
Rathaus Schöneberg, Berlin, Germany, December 4th 2013