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Tuesday, November 6, 2012

U.S. Deficits: Reflect Virtue or Vice?

Chronic government fiscal deficits, and thus debt, may suggest that a people is not up to self-governance. Moreover, the imbalance may be a drawback of democracy itself. That is to say, a people may not have sufficient will to constrain its own consumption to that which the people are willing to pay.
 
 
 
In the period from 1970 to 2012, that the vast majority of the years show a deficit indicates the difficulty involved in elected representatives voting to ensure that the people pay in taxes as much or more than the government spends. “It’s an extraordinarily dangerous situation,” former Federal Reserve Chairman Alan Greenspan said in 2012. “I believe we underestimate the size of current financial imbalances and how difficult it will be to resolve them. We’re trying to do this without pain. There’s just no credible scenario in which that happens.” The key phrase here is “without pain,” for it points to the underlying mentality that was pushing back a viable solution. To be sure, both the widening deficits and lack of desire to close the gaps from 2009 could draw on Keynes’ theory that governments should spend more and tax less during a recession in order to stimulate economic growth. However, the sheer number of years between 1970 and 2012 with significant deficits in terms of GDP suggests that the rationale has at best limited applicability. Even in the context of recession, the fact that the deficits were over $1 trillion in each of the four years after 2008 suggests that something else is in the mix. Nor could “wartime spending” be cited for those deficits, as significant domestic spending was also involved. Moreover, the U.S. was not at war during all the years of deficit spending from 1970 to 2012. In other words, something more systemic was going on throughout the period than recession or war.
 
According to the Wall Street Journal, the federal debt in the U.S. grew “through a combination of economic downturns, tax cuts and spending choices made by lawmakers and presidents from both parties.” It is not a partisan matter; rather, it involves choices made by elected representatives irrespective of party-affiliation. For this reason, we can begin to suspect democracy itself as the culprit, and below this the values and mentality (and indeed character) of the voters. In particular, too many are too fine with spending or consuming without feeling the need to pay for it in a timely manner. This is ultimately a question of values behind one’s character. At the political level, this manifests as societal or cultural in nature; even so, the imbalance is really in the individual psyche itself.
 
The vice is one of slothful selfishness at the expense of others—those in the future who will ultimately either have to pay the bill or see the government default. It is significant in this regard that Thomas Jefferson and John Adams agreed that a virtuous citizenry is necessary for a viable republic to endure. The question is perhaps what happens to it once a citizenry is no longer virtuous. Collapse even from a fundamental lack of fiscal balance can be stayed by the inertia of the status quo, as though a ship kept moving by its own momentum for a considerable time. In the soothing motion, the passengers can easily be lulled into the sensation that all is well.
 

Source: Damian Paletta, “Tough Calls on Deficit Await the Winner,” The Wall Street Journal, November 6, 2012.