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The Federal Deficit: The Real Issues

. . . But are the high interest rates that impose such a heavy burden on the budget inevitable?  What happened during the Second World War proves beyond a shadow of doubt that they are not.  In the war years from 1942 to 1945, the average annual deficit was 23 percent of Gross National Product, and of course that was a time when available economic resources were stretched to the limit.  Yet the interest rate on three-month Treasury bills in those years was less than one-half of 1 percent, and on highest-grade corporate bonds it was less than 3 percent. . . .

. . . The fundamental reason is a whole series of changes in government policy.  The Roosevelt administration was determined to minimize the cost of carrying the war debt, and to this end Federal Reserve and Treasury policies were concentrated on keeping the interest rate below a set maximum. . . .

Practically all recent discussion of the alleged evils of deficits leaves out what really matters, i.e., the origin and purposes of the deficits.  The . . . deficit mess stems from the simultaneous reduction of taxes on the rich and a monstrous expansion of military spending [plus the impacts of the Great Recession in our present circumstances — Ed.].  At the same time, welfare expenditures have been severely reduced on the pretext that the deficit needs to be contained.  The result is a more regressive distribution of income, a dismemberment of New Deal reforms, and a wasting of human and economic resources — not to mention the worldwide devastation that the expanded weaponry can wreak.

But this is not the way it has to be.  Deficits can be socially useful and constructive if incurred to provide jobs for the unemployed, strengthen health and education services, construct decent housing, protect the weak and elderly, and restore the country’s disintegrating infrastructure.

But, we shall be asked, wouldn’t a benign deficit also contain the potential for renewed inflation and turmoil in financial markets?  Perhaps, if nothing else were done.  The fear of deficits rests on the implicit assumption that everything else in the economic system is sacrosanct and only deficits are subject to manipulation.  Private ownership of profit-making banks, a huge financial superstructure, and aggressive expansion of these institutions are taken as part of the natural order of things.  Similarly it is implicitly assumed that the enormous waste of credit to finance mergers of large corporations, to promote tax-avoidance schemes, and to fuel speculation is unavoidable.

What is true is that the contradictions of capitalism cannot be resolved, let alone eliminated, without transforming the system from one of production for profit to one of production for use.  But this doesn’t mean that all reforms are impossible.  Much depends on circumstances and on the understanding, organization, and militancy of the vast majority of the people who are victimized by the present system.  The rich historical experience accumulated during the periods of the Great Depression and the Second World War has demonstrated that public control over finance and prices can minimize many of the complications incident to large budgetary deficits.  But for this the mass of the population would have first to free itself from the blinders imposed by the dominant ideology and unite to fight for its own interests.


Paul M. Sweezy (1910-2004) was a Marxist economist and founding editor of Monthly Review.   Harry Magdoff (1913-2006) was a co-editor of Monthly Review (1969-2006).  The text above is an excerpt from the Review of the Month of the April 1984 issue of Monthly Review (35.11).




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