In “A ‘get-it-done’ choice is there for GOP’s taking” (D.J. Tice column, July 26), former First District U.S. Rep. Tim Penny expressed great appreciation for his friend and former congressional colleague, Ohio Gov. John Kasich. Both are deficit hawks, advocates of fiscal responsibility and proponents of a balanced-budget amendment.
Penny, deservedly, is highly respected in his former district, which is populated by common-sense, hardworking Minnesotans who practice fiscal responsibility in their family and business affairs — constituents who realize that debt can be dangerous if not kept within reasonable control. Perhaps it is logical that such constituents would favor similar fiscal responsibility for their government. But are families and governments analogous? Consider two examples:
1) At the outset of the Great Depression in the 1930s, President Herbert Hoover was an advocate of a fiscal policy that would reduce the national debt. Hoover reasoned that debt constituted a hindrance to economic health and was a cause of our economic malaise. By contrast, his successor, President Franklin Roosevelt, was moved by the reality of the human suffering brought on by unemployment of up to 25 percent of the U.S. workforce. Roosevelt judged this a larger problem than our national debt. He introduced an alphabet soup of programs designed to reduce this suffering and resource waste.
Today’s liberals generally believe that Roosevelt’s programs worked. Many conservatives remain dubious. But few can doubt that “doing something” dampened the likelihood that Americans would revolt against our capitalist economic system.
When government offers no acknowledgment of the suffering of its constituents, revolt may become rational for constituents. With the advent of World War II, massive government spending accompanied by massive increases in national debt caused the “employment problem” to be reversed; we moved from a condition of excess labor supply to one of inadequate labor supply.
At war’s end, many feared our economy would return to prewar stagnation. Lawmakers on both the right and the left cooperated in passage of the Employment Act of 1946. That act committed the federal government to a new responsibility: the attempted maintenance of high levels of aggregate employment, output and income. This fiscal policy, countercyclical in nature, would stimulate aggregate economic demand when unemployment exceeded “acceptable” levels; it would reduce demand when an excess seemed responsible for causing an “unacceptable” level of demand-pull inflation. And such a fiscal policy would result in a balancing of the federal budget, but over time, on an unplanned cyclical basis.
Instituting a common-sense mandated annual balancing of the federal budget would eliminate discretionary fiscal policy as recommended by the Employment Act of 1946. Is balancing a budget during a calendar-based time interval so important that we would tolerate high unemployment as the price for achieving that goal? In 1946, Congress apparently didn’t think so.
2) The current status of the Greek economy. Greece is running a large, euro-denominated deficit. Germany, the major economic power in the euro group of nations, sees the Greek debt as a major source of economic woe for Greece and for its trading partners. Greece now faces 25 percent unemployment, similar to what America suffered in the 1930s.
Greece’s Prime Minister, Alexis Tsipras, likely was elected because he seemed more concerned by his nation’s unemployment than its national debt. Germany’s Chancellor, Angela Merkel, and the euro coalition apparently are recommending a fiscal policy for Greece similar to what President Hoover recommended for the U.S. when our country faced a similar problem more than eight decades ago.
Tsipras lost the debate with the euro coalition and feels forced to back down in deference to the coalition’s wishes. Greece now is adopting additional measures of economic austerity, including a substantial increase in its value-added tax. The resulting reduction in aggregate demand seems likely to further reduce economic output and employment in Greece. How will this affect Greece’s ability to repay debt?
Keep an eye on the results. We will be witnessing a sort of “reality test” of what constitutes appropriate fiscal policy when a country faces concurrent issues of indebtedness and mass unemployment.
Paul Thompson, of Mankato, is a retired economics professor.