There’s a sense in the air that the answer to our problems, be it economy, deficit or schools, is to cut, cut, cut. Cut salaries, cut benefits, cut programs. On the surface, the logic of cutting makes some kind of sense. There are deficits at the Federal and State level (no, Virginia’s budget is not in balance if you fail to make payments into the state retirement fund), and spending less is one of the common prescriptions for closing deficits.
The dirty truth, however, is that no long-term government deficit has ever been solved simply by cutting the budget. Budget cuts are net drags on an economy, and a shrinking economy exacerbates budget problems by yielding shrinking revenues for the government, which makes deficits worse, which creates incentives for more cuts, which further drag the economy… It’s a vicious, downward cycle that leads to malaise and bankruptcy.
The fact is that the only thing that has ever truly balanced a major government budget is economic growth. That’s it. All other supposed “answers” are simply second-order results of robust economic growth. So, if you are truly in favor of balanced budgets, you must be in favor of policies that encourage economic growth.
Ah, but there’s a catch. The type of growth matters. If you look at the history of balanced Federal budgets, they came near the middle and end of periods of economic growth in which the bottom 50% of households saw their incomes rise and fortunes improve.
Follow below the fold for a short, and by no means complete, historical survey of balanced budgets.
The balanced budget that came in the late 1990s occurred in a period when the lowest-income Americans saw their unemployment decrease and incomes increase. As a result, tax revenues went up, and the budget was balanced.
Similarly, the balanced budget of the late 1950s was during the period when the great American middle class was born thanks to higher manufacturing wages (union wages, incidentally) and economic growth across the lower half of the spectrum. Tax revenues went up, unexpectedly, and the budget came into balance. In fact the entire Time article on the budget of the 1950s is worth quoting on this matter.
Reiterating its faith in the continued growth of the U.S. economy, the Administration last week came close to outright prediction that tax revenues, higher than estimated, plus careful cost-cutting, can wipe out the $1.7 billion federal deficit and balance the budget. After discussing proposed 1957 expenses with the President at Gettysburg, Budget Director Rowland Hughes told reporters that the Government’s income should match its estimated $63 billion outgo, not only in 1957 but in the current fiscal year ending June 30, 1956.
Neither stringent cost-cutting nor the Geneva conference failure, said he, would substantially affect military expenditures (now $34.5 billion yearly). “Our budgets for the defense program have not been built on day-to-day shifts in diplomatic discussions. We have built them on a long-range basis of strengthening U.S. power. We are engaged in a regular, permanent strengthening program.”
But Hughes studiously declined to commit the Administration to tax cuts in 1956. When asked if he had not in effect foreshadowed them by his budget predictions, Hughes replied: “I don’t think you can put those words in my mouth, sir. I wish you could.” – Time.com
Notice anything there? Like the Republican administration speaking out against tax cuts in the interest of balancing the budget?
Going back to the balanced budget of the 1830s, we see a similar pattern of economic opportunity and good fortune among small farmers and artisans, at least up until the Wall Street of the time triggered the panic of 1837.
So, for all of those advocating cutting our way to balance in one form or another, I submit to you that history is not on your side. It is not Administrations or Congresses who cut spending and taxes who balanced the budget, it’s those who controlled spending while maintaining taxes in an era of robust economic growth that balance