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The Federal Debt
And how it grew, and grew, and grew…
November 1995 | Volume 46, Issue 7
But there was a second reason that Keynes so quickly swept the field among economists. It might be called the Madison Effect, in honor of James Madison’s famous dictum that “men love power.” After all, until Keynes, politicians had not needed economists. But Keynes made them indispensable, and economists knew it.
Keynesianism gave politicians intellectual justification for pursuing their self-interest in both high spending and low taxes.
Politicians took a little longer to come around. Those of Truman’s and Elsenhower’s generation, born in the last decades of the nineteenth century, had been raised in the classical tradition, and many had actually read Smith, Ricardo, and John Stuart Mill in their youth. By the 1930s these men were middle-aged and relatively unreceptive to new ideas, especially fundamental ones.
Also, the predictions regarding the postwar American economy by the Keynesians proved very wide of the mark, foreseeing unemployment when inflation turned out to be the major problem. And even Keynesians, using any number of different variations on the Keynesian economic model, gave contradictory advice. Harry Truman joked that what he needed was a onearmed economist, because the ones he had were always saying “on the one hand … but on the other hand.”
The politicians, however, were also fully aware of the sharply different political fates of Hoover and Roosevelt. Passive deficits therefore were no longer questioned in times of recession, nor are they likely to be again.
And fully Keynesian notions began to creep in. In 1946 Congress passed the first Full Employment Act, committing government to actively seeking high employment in the national economy, something that would have been unthinkable twenty years earlier. That same year the President’s Council of Economic Advisers was created, within the White House itself, to offer the President options for handling the economy as a whole.
Still, between 1946 and 1960 there were seven years of deficit and seven of surplus, all but two of the deficits small ones. The fact that two of those years of surplus were during the Korean War demonstrates clearly that the idea of pay-as-you-go still had powerful political appeal. And the national debt, while it did not shrink in nominal dollars (in fact it rose from $271 billion to $290 billion), did shrink by nearly a third when measured in constant dollars. And the economy in these years grew swiftly. So the national debt, which had been nearly 130 percent of GNP in 1946, was less than 58 percent of GNP by 1960.
But if Keynesianism was largely an alien or at least uncongenial concept to those who served under Truman and Eisenhower, it had a powerful appeal for the new generation of politicians who came to power with John F. Kennedy in 1961. They had been educated during the Great Depression and its aftermath. Many had been taught to think economically in Keynesian terms (the first edition of Paul Samuelson’s thoroughly Keynesian introductory college textbook, which has sold in the millions, came out in 1948).
And again the Madison Effect exerted a powerful tug. Until Keynes the business cycle had been regarded as a force of nature, no more to be influenced than the tides and thus not within a politician’s venue. Now, however, there was an elegant theory that not only justified political manipulation of the economy as a whole but virtually commanded it. By enlarging the scope of legitimate political action, Keynesianism enlarged the power of politicians. By the end of the 1960s, even so basically conservative a politician as Richard Nixon was able to say, without fear of contradiction, “We are all Keynesians now.”
Moreover, politicians have a natural inclination to spend in general, even if they might disagree fiercely about what, specifically, to spend on. After all, it earns them the gratitude, and likely the votes, of the beneficiaries. Equally, they hate to tax and perhaps lose the votes of those who have to write bigger checks to the government. Under the old consensus, pleasing both halves of the body politic had been largely impossible, and politicians spent much of their time choosing between them and hoping they guessed right.
Keynesianism gave them an intellectual justification for pursuing their self-interest in both high spending and low taxes. It is little wonder that they did so. Constantly enlarging government spending to meet one more perceived need, they avoided higher taxes either by paying with the increased tax revenues of an expanding economy or by actually increasing the debt, despite the prosperous times.
Since John F. Kennedy was inaugurated as President, the U.S. government has run a budget surplus exactly once. During the first decade of total Keynesianism, the national debt increased by nearly a third (although it stayed nearly flat in constant dollars, thanks to the increasing inflation that marked the latter years of the decade). That was a greater increase than in any previous decade that did not involve a great war or depression. But because the sixties were also a decade of strong economic growth, the debt as a percentage of GNP continued to decline, although at a much slower pace than in the late forties and fifties. By 1970 the national debt was only 39.16 percent of GNP, lower than it had been since 1932.