Reprinted from neweconomicperspectives.org by William Black
Pete Peterson is back, and his message and rhetoric are always the same. The federal budget deficit is a disaster and -- any day now -- will produce massive inflation. Peterson has written his 20,000th version of this fantasy in the NYT with Paul Volcker. The first rhetorical game that (Peterson) plays is to assert that it is bad for a sovereign nation to run budgetary deficits because they are not "sound and sustainable." Except that the U.S. has run deficits for most of its existence without ever suffering hyper-inflation. For a nation like the U.S. with a sovereign currency, a federal budgetary deficit is not unsound and it is not unsustainable. Federal budget deficits can, depending on the circumstances, be the very definition of "sound" fiscal policy -- a policy that is often essential for "sustainable" recovery and growth of the economy.
Peterson asserts that his latest warning of fiscal disaster might, for the first time in his career be correct. Peterson claims that this time his warnings are real because the "widely respected" Congressional Budget Office (CBO) says its model predicts a growing deficit. The CBO is not "widely respected" by economists. It uses macroeconomic models that produce nonsense results. Economists know that the CBO models cannot predict reality because they were constructed out of ideological nostrums that have repeatedly been proven false by reality. The CBO has gotten credit in the past from Democrats because it declined to use even more flawed "dynamic scoring" models favored by many Republicans that falsely predict that tax cuts lead to magical, spectacular growth.
The ultra-right-wing Republicans that control Congress chose an ultra-right-wing fanatic to run the CBO who has a track record of being spectacularly wrong. He is the opposite of "widely respected." Even before his appointment, the CBO functioned as a barrier to the vigorous stimulus policies that we have known for over a half-century to be essential to respond to a Great Recession. The result was a much slower and weaker recovery.
The financial markets price the risk of Peterson's repeatedly promised, imminent hyper-inflation. They price that purported risk as essentially zero. Japan is praying for exceptionally low inflation (it suffers from deflation) despite budget deficits roughly three times larger than Peterson is warning about.
The Grandchild Guilt Gambit (G3)
Peterson knows he cannot win the economic argument because he is zero for 20,000 in his predictions of hyper-inflation in the United States. Instead, his second rhetorical game is to infuse parents with guilt about the fate of our grandchildren. Here is one problem with the G3 -- and it comes from Peterson's own attempt to induce grandkid guilt. Peterson warns that:
[T]he national debt [will be] about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II.
Why Peterson Does Not Discuss the Great Depression or World War II Deficits
The reasons why Peterson did not analyze either the Great Depression or World War II deficits is that studying either would destroy his G3 myth. The grandkids of the economists and bankers who advised running budget surpluses during the Great Depression had their lives brutally diminished by that economic malpractice. Further, they did not escape budget deficits because attempts to run a budget surplus made the Great Depression far worse and added to the deficit.
Peterson did not discuss the World War II deficits because they falsify his arguments to an even greater extent. The U.S. ran very high, in historical terms, budget deficits in World War II. Further, inflation was likely to be more of a problem than in peacetime because critical real resources (labor and material) were in fact desperately short to support the unbelievable production levels of material for the war effort. Women played a vital role in this success, reducing greatly what would have been devastating bottlenecks. FDR's generation of officials chose to run massive deficits in order to fight and win World War II. It was the grandkids of FDR's generation who fought World War II. A journalist famously labeled them our Greatest Generation.
Should we have surrendered to Germany and Japan instead, rather than face the terrible fate of nations that run budget deficits? Would surrender have been preferable for our grandkids? Did those budget deficits in the 1940s and 1950s crush our economic growth in those years? The result of the war time expenditures was such a sharp increase in demand due to vastly increased government spending that the economy quickly recovered and operated at levels far above what conventional economists would have considered "full employment" without generating harmful levels of inflation.
But even more importantly, the deficits were essential to win the war against the Axis. That was superb for the grandkids.
To help win the war, the U.S. adopted price controls -- and put John Kenneth Galbraith in charge -- the ultimate nightmare of neoclassical economic ideologues. What they will never forgive Galbraith for was his contribution to the success of the war effort through a program that was anathema to their dogmas. More generally, planning proved essential and effective in developing the arsenal of democracy and in operations such as D-Day, causing von Mises and von Hayek to gnash their teeth. The Soviet Union was able, with substantial aid from the U.S., but overwhelmingly from its own troops and resources, to develop what many consider the world's best main battle tank (the T34) and to inflict the decisive losses on the Nazis.