A Balanced Budget: Worthy Superstition?

I recently came across this quote from the late Paul Samuelson from an interview he did with Mark Blaug a few years ago:

„I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say „uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”

It reminded me again of the perniciousness of the „starve the beast” idea that I and other supply-siders put forward years ago as a way of rationalizing tax cuts in a fiscal responsibility framework. The idea made sense at the time and would have worked if Republicans had even paid lip-service to the idea of just restraining spending. They didn’t even have to cut anything; all they had to do was resist enacting massive new spending programs and show a little bit of responsibility about cutting taxes.

But as we saw during the years when Republicans controlled both houses of Congress and the White House, we got tax cuts up the wazoo, two wars, a massive expansion of Medicare, and enactment of every pork barrel project ever imagined, dutifully signed into law by a president with no principles of any kind, and not one penny of any of it was paid for.

Today, the whole idea that tax cuts required budgetary restraint for the supply-side medicine to work has been completely forgotten. Republicans seem to think that all tax cuts pay for themselves and spokesmen for conservative economics continue to maintain that ever more and bigger tax cuts will eventually lead somehow to spending restraint. Whenever I hear Larry Kudlow make this argument for the umpteenth time I am reminded of the definition of a fanatic: someone who redoubled his efforts after losing sight of his objective.

A long time ago, Herb Stein tried to explain to me that starve the beast theory wouldn’t work because belief in the importance of a balanced budget was the only thing holding back the forces of spending and eventual bankruptcy. In retrospect, destroying the balanced budget constraint to make big tax cuts politically viable was like opening Pandora’s Box. As I have said before, I regret any role I may have played in doing so.


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