Case Studies
Buy Bonds
 Most of us have been taught that to spend more money than we earn is to court financial disaster, but the federal government seems to plays by a different set of rules. Almost every year the country runs a deficit. Yet we’re told that deficit is necessary. Even beneficial. But deficits piled one on top of another create a growing national debt. And the interest payments on that debt add more dollars to the next year’s deficit. During a five year span back in the 1940’s our national debt more than quadrupled as we fought World War II. While taxes paid for some of the war, the rest was borrowed. The government issued war bonds and it was patriotic to buy war bonds and stamps to support the armed forces.
The nation had gone deeply into debt to pay for the war. The debt never rally went away. It just seemed to shrink in size compared to the total GNP.
| Comment & Analysis by Richard Gill Gill explains that basic costs of WWII were borne by the generation that lived and worked during WWII. In terms of guns and butter, we started before the war with an economy that was producing only civilian goods (butter). When the war came, we had to divert some of our resources to gun production. The economic cost of the war was borne right then and there and was basically the amount of butter we have to give up because we are producing armaments. But because we entered the war from the Great Depression, with enormous unused capacity and unemployment in the economy the cost of the war in terms of lost butter production was minimal. |
Budget Surplus
 President Eisenhower wanted to leave office with a balance budget so he began to push hard for a surplus in 1960. But Vice-President Nixon was running for President that year. He wanted a growing economy, so he argued for a deficit. Many economists agreed with Nixon, but Ike stuck to his guns. Many of Eisenhower’s advisors thought Eisenhower did not have time to oversee a complete recovery from the recession of 1958, that his drive for a budge surplus was premature. Nixon urged Eisenhower to stimulate the economy with an immediate tax cut. Ike declined. By mid-summer the economy had ground to a halt well short of full-employment. The budget surplus was holding money out of the economy and costing workers their jobs. While John Kennedy campaigned on a promise to get the country moving again, Richard Nixon was forced to publicly support a policy he privately opposed. The country hit bottom just two weeks before the election. For Nixon, the damage had been done. Kennedy won the President with a narrow margin.
| Comment & Analysis by Richard Gill What the government ought to do, most economists in 1960 were saying, is follow this course: Budget deficits during the recessions to expand the economy; budget surpluses during the booms to keep things in check. The government ought to pursue a counter-cyclical policy. |
The Neverending Deficit
 For at least the next thirty years, after President Eisenhower’s 1960 budget surplus there would be only one balanced budget. Many members of Congress were alarmed. Alice Rivlin, from the Congressional Buudget Office worried that the government was borrowing a large portion of our national savings, leaving little for investment in projects that might stimulate the economy. And a worsening economy brought lengthening unemployment lines and higher deficits.
Then, in the 1990’s came the dot com boom which brought about a huge rise in the stock market and with it capital gains taxes to provide a welcome boost to the treasury. A surplus of billions was predicted and in 2001, George W. Bush, the new President handed Americans a sizeable tax cut. Then... 9/11. The stock market tanked. Defense spending went sky high. The war on terrorism had begun and the surplus was gone. History had repeated itself and the rising deficit had once more raised its ugly head.
| Comment & Analysis by Nariman Behravesh There was no end to the suggestions on how to spend the growing surplus. Cut taxes.Increase spending on education, defense and a myriad of public programs. Or pay down the debt and fix the problems of Social Security. The President chose the former. But that alone did not do in the surplus. Nonetheless, in combination with the war on terrorism, a collapse of the market and a growing recession, the deficit was on the rise again and a neither a balanced budget nor a surplus is projected for at least a decade. |
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