On Federal Deficits

John Steele Gordon makes a number of interesting statements about the origins of and possible solutions to our Federal deficits. He asserts that the eighteenth-century Founders, like other eighteenth-century Englishmen, thought that the King was expected to live off his own revenues. This was indeed true of an earlier phase of British history, but it is stretching a point very far indeed to claim that this was true after the end of the seventeenth century, when a revolution in British public finance compounded of new debt instruments (the sinking fund) and a radical increase in public revenues (much of it the excise, in an age of radically expanding trade) meant that Britain could run and finance vast deficits, deficits that gave it the means to first stalemate and then shatter the French monarchy in what has been called the second Hundred Years War, picking up control of a quarter of the globe in the process.

While the consols (the very rough equivalent of our Federal bonds) tend to get much of the credit for this achievement, the effect of radically increased state revenues must not be discounted. A comparable innovation today would be an increase in Federal revenue from a carbon tax and a value-added tax so vast that the Federal government would be unlikely to run deficits in peacetime. So one way to cut down the deficits, striking in its absence from Mr. Gordon’s analysis, would be to increase rather than diminish public revenues. Recent legislation leading to the abolition of estate taxes comes to mind here. This legislation could be altered, excluding estates of less than $5 million from tax, but reinstituting fairly stiff rates for estates exceeding that sum, at no great political cost.

Mr. Gordon has a terse explanation for the increase in Federal expenditures: “How did this happen? Simple. It’s called democracy.” Well, yes and no. The U.S. has had something close to universal white male suffrage for all of our history, but the scale of peacetime Federal spending increased so dramatically only in the twentieth century. Democracy is unlikely to be the only cause of the change, unless we assume that black and female voters have been the sole agents of fiscal transformation. Other causes have been war, the threat of war, and a change in the majority’s definition of legitimate public endeavor.

It is not obvious that financing significant improvements in public education is no appropriate role for the Federal government, and my memory is that polls show a majority of Americans claim that they are willing to pay higher taxes for such a purpose. For most of the history of the Republic, that would not have been seen as a legitimate role for federal spending, which is to say, our notions of legitimate public spending change. Americans are often fairly practical. We will do what we think will work. Sentiment in favor of massive federal intervention in many spheres of the economy, or broad opposition to such intervention, sometimes follows evidence of failures or successes in existing policy. Federal regulation of telecommunications, air travel and trucking turned out to have some perverse effects; deregulation did work; and we went on to deregulate more sectors of the economy. If some of that subsequent deregulation fails to work as planned, we’ll probably reverse it. My guess is that turning over prisons to entrepreneurs will never happen on a wide scale, and that the privatizing of some services traditionally performed by the military will eventually be reversed. And my hunch is that our current greatly increased deficits spring in significant part from reductions of revenue, rather than from a gross and ludicrous increase in frivolous public expenditure.

Two more things: Mr. Gordon is probably too modest in his assumption that unlike eighteenth-century aristocrats, our rich no longer have the power to check taxation of their revenues. The rich have seen some remarkable tax cuts in my lifetime, which makes me think that their power to affect U.S. fiscal policy has not withered away to nothing. If I remember correctly, the maximum bracket rate was something like 83 percent when John F. Kennedy took office. One interesting partial solution to the problem of deficits would be to restore higher taxes on the rich. That would not only modestly increase public revenues, but it would probably make the rich, and their lobbyists, more diligent about catching that $200 million bridge in Alaska.

My last point: Gordon suggests a line-item veto for the President. What bothers me about this is the possibility that the President may be wrong and the Congress right, which sometimes seems as great as the opposite possibility. For example, it seems clear that we need a larger Army. Suppose the Democrats take back the White House, in the face of a rupture of the housing bubble following rising interest rates driven by inflation, with savage consequences for consumer spending and business confidence. But due to gerrymandering of House seats and more virulent culture wars affecting Senate races, the Republicans retain control of Congress. Does Mr. Gordon really want a possibly cheese-paring and anti-military Democrat to have a line-item veto on military expenditures? During the Great Society and the New Deal, did the White House or the Congress do more to restrain public spending? And insofar as Franklin Roosevelt did (initially) abhor a deficit, was that good or bad for the pace of our recovery from the Great Depression?