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![handle is hein.taxfoundation/iretcgadv0042 and id is 1 raw text is: May 18, 1995 No. 44
THE CLINTON ADMINISTRATION'S
PRO-DEFICIT POLICY
Congress's House and Senate Budget
Committees have developed detailed, explicit plans
for bringing the federal government's budget into
balance by the year 2002. Instead of responding
with an alternative deficit-
cutting plan of their own,
Administration officials, High gover
notably National Economic instead of bei
Council Chair Laura D'Andrea Ms. Tyson
Tyson and White House Chief weaken the e
of Staff Leon Panetta, have order for the g
reacted by disparaging the
Congressional blueprints on d ried
macroeconomic grounds.
According t o t h e psouces f
Administration officials, large- produtive pi'
scale deficit reduction is
economically dangerous and,
in any case, not particularly useful. The
Administration's budget, which was presented in
February, projects $200 billion annual deficits from
now through the year 2000.
Ms. Tyson states the Administration's case
succinctly, [A]ny effort to reduce government
spending takes a dollar out of the economy. And
when it takes a dollar out of the economy that dollar
means a dollar of reduction in demand in the
economy. So it increases the contractionary risks on
the economy.
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Economics of
Taxation
This is a throwback to the type of Keynesian
analysis so popular- and so mistaken- a
generation ago. The essence of the Keynesian
analysis is that the economy is driven by total (or
aggregate) demand, that the private component of
demand is not stable or dependable, that the
government can add or subtract demand from the
economy at will by means of fiscal and monetary
policies, and that the government should use its
control over demand to fine-tune the level of
economic activity.
At a practical level, the Keynesian model lost
favor in the United States in the 1970s when it
proved unable to address accelerating inflation. It
incurred an even worse setback in the 1980s when
inflation collapsed while the economy enjoyed its
longest peacetime recovery, contrary to the
predictions of many prominent Keynesian
economists that the Reagan
Administration's policies
t spending, would lead to either runaway
1 vgorating as inflation or a collapsing
sts, tends to economy.
meetoobtain The theory underlying the
gomernet- Keynesian model suffers from
mist take the numerous defects. The flaw
r y Oi-e that bears most directly on
what Ms. Tyson said is the
ises. failure to ask where the
government gets the resources
that it spends. The
government does not create wealth. When the
government spends a dollar, it must obtain that
dollar by taxing or borrowing it from the private
sector, both of which reduce private demand by a
dollar, or by printing the dollar, which invites
inflation. High government spending, instead of
being invigorating as Ms. Tyson suggests, tends to
weaken the economy because in order for the
government to obtain resources for government-
determined uses, it must take the resources from
typically more productive private uses.
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