The Democrats’ Line in the Sand

Until the Bush administration, American presidents’ economic advisers since World War II have been advocates of aiming for budget surpluses except in times of weak demand and possible depression. With Republicans apparently abandoning fiscal discipline, a more hawkish fiscal stance may no longer be possible in future Democratic administrations.

BERKELEY – Ever since the 1928 work of Frank Ramsey, economists have accepted the utilitarian argument that a good economy is one in which returns on investment are not too great a multiple – less than three – of the rate of per capita economic growth. An economy in which profits from investment are high relative to the growth rate is an economy that is under-saving and under-investing.

This idea has also given rise to a very strong presumption that if an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment. This is why most economists are deficit hawks.

Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment. Moreover, a lot of emergency government spending on current items is really best seen as national savings and investment. Franklin Delano Roosevelt could have made no better investment for the future of America and the world than to wage total war against Adolf Hitler. Likewise, Presidents George H.W. Bush and Bill Clinton ought to have recognized in the 1990’s that something like a Marshall Plan for Eastern Europe to help with the transition from communism would have been an excellent investment for the world’s future.

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