As the interest on the debt consumes an ever-larger portion of the federal budget, the temptation will become overwhelming to “monetize” the debt.
In the last two decades, Keynesian demand management economic theory has come under increasing attack. The most telling salvos have been leveled by economist James Buchanan, whose Nobel prize in 1986 for his critique of applied Keynesian theory set off a storm of protest in liberal academic circles. Paul Craig Roberts, Jude Wanniski, and others have continued to question the wisdom of what had previously been almost unquestioned economic orthodoxy. Nevertheless, Keynesian theory continues to dominate the policy-making of the federal government.
In a book written for the layman, Larry Burkett has reviewed the accomplishments of a growing federal government busily applying demand-centered economic policies (growing federal deficits and debt, increasing use of debt by business and households, and government regulation gone wrong), and concluded that severe economic troubles lie ahead. He does not set dates, but like an observer sitting on a hill overlooking a large ice-bound river, he simply points out that the ice is piled up in abnormally high and massive ice dams, and that spring is inevitably on its way. It may be early, or it may be late, but as surely as the seasons roll, the ice will eventually break up and flood down the river. Whoever stands in its path may be wiped out.
Keynesian economic policies—with their explicit license for continuing federal deficits and their implicit preference for higher levels of consumption, reduced saving, and a larger role for government in the economy—are one of two things. They are, as mainstream economists have told college economics students since World War II, the means to continued, depression-proof prosperity. Or they are, as others like Mr. Burkett insist, a prescription for disaster.
A review of textbooks written by prominent economists supporting the first position will turn up statements that now inspire less confidence than they did when first written. One author (the chairman of President John F. Kennedy’s Council of Economic Advisers) had no doubts about the desirability of deficit spending when he wrote in his 1960s college text that the country faced the prospect of deficits of choice (“deficits of strength”) incurred as necessary to sustain demand, or deficits due to low revenues (“deficits of weakness”) incurred because the federal government lacked the will to follow the dictates of Keynesian theory. Another text of the time insisted that the debt was not a real problem, because, although larger year by year, it nevertheless was a smaller fraction of the nation’s gross national product. (That was true at the time, but has not been true since 1974.) Still another insisted that the debt should not be a source for worry since “. . . technically there is never any question of the federal government going bankrupt. It can always manufacture money.”
That, Mr. Burkett insists, is exactly the point. As the interest on the debt consumes a larger and larger portion of the yearly federal budget, and more money is borrowed each year to pay the interest on what was borrowed in previous years, the temptation will become overwhelming to “monetize” the debt, first a little bit at a time, and then at an increasing rate. The possible result? Chaos, in the manner of post-World War I Germany.
This book traces the path that other governments have followed in reaching the brink and plunging over. It also describes the impact that hyperinflation has on a society. It even takes away the faint hope that those deeply in debt might entertain—that they could pay off their debts in devalued dollars. Mr. Burkett believes that laws would be passed to protect those banks still solvent, indexing all debts to the rate of inflation. Ordinary debtors, many without jobs because of the resulting depression, could then be faced with debts on homes, cars, and other goods many times the amount they initially borrowed.
Is this too gloomy a scenario? Perhaps. But Mr. Burkett builds a solid case for an impending economic earthquake. He also outlines actions that he believes necessary to prevent it (bring federal spending under control and restore fiscal discipline through a line-item veto or other actions). He doubts, as the reader may also, that such steps will be taken by our elected leaders in time to prevent fiscal chaos.
Although readers of this book may or may not agree with the author’s religious views, they are likely, in an age when values are something not much talked about, to find the author’s emphasis on values thought provoking.
If this book leaves the reader with a concern that Mr. Burkett may be correct, he will find interesting the author’s advice for minimizing the personal financial damage that may result from an economic earthquake.
Dr. Gaston is an assistant professor, College of Business Administration, Central State University, Wilberforce, Ohio.
