Voodoo Deficits

Most people acknowledge that the U.S. economy did well under Reagan--inflation went down, production and GNP increased, and unemployment lessened. Many fear that this prosperity is merely the calm before the storm. They point especially to the mounting budget deficits, the highly unfavorable balance of trade, and the strong position of our competitors, most notably Japan.

Robert Ortner, a former Chief Economist of the Department of Commerce, mounts a vigorous attack on these naysayers. Budget deficits are in his view only a minor problem. True, money spent must eventually be repaid, but to a large extent “we owe it to ourselves.” A person who reasoned this way about his individual debts would quickly come to grief; however, nations, after all, do not always obey the same rules as individuals.

The negative balance of trade poses even less of a problem. This “problem” results from the fact that foreigners wish to invest in U.S. companies, hardly an undesirable state of affairs. In order to invest, foreigners must of course transfer money to the United States. Unless we wish to accumulate foreign currency, we in turn must spend their money to buy their products--that is all their money can be used for. This spending accounts for the “unfavorable” trade balance. Because of it, U.S. consumers gain from both increased investment and greater availability of goods.

The rise of rival economic powers is a genuine problem but one which we can adequately confront. To do so, the key lies in increased investment, which Ortner distinguishes in classic Keynesian fashion from increased savings. Policies such as a flat rather than a progressive tax will generate the needed rise in investment. Thus, Ortner concludes, the U.S. economy is in excellent shape; and, given correct policy, it will do even better in the future.

Ortner’s analysis is based on an unusual combination of conservative and Keynesian economics. Readers will find it stimulating if not altogether convincing.