Memo To: Tony Snow, FoxNewsSunday
From: Jude Wanniski
Re: A Little Lesson
I'd normally write this directly to Brit, Tony, but you know that only two weeks ago I wrote you a personal e-mail saying that Brit Hume was practically the only commentator on the Sunday talk shows who could see through the sliced baloney being served up about the budget. Besides, the e-mail address I had for him does not work any more. So I'll write this to you and hope you can pass it on to him. All this does go to the heart of the debate about surpluses and lock boxes and Social Security.
In particular, Brit made the remark that he knows of no economic theory that says when you have a $160 billion surplus in an economic downturn you should not use it. In fact, there is only ONE economic theory that says you should use a surplus to "stimulate" the economy. It is the original theory set forth by the British economist, John Maynard Keynes, back in 1936. He was absolutely, totally wrong in his theory, which was that because rich people have more money than they want to spend or invest, the government should tax it away from them, or borrow it from them, and spend it to put the economy in motion. There is no other economic theory in the history of the world that I know of that says a budget surplus should be deployed to expand the economy.
1. Monetarists, who like Keynesians are also demand-siders, do not have a theoretical framework that says the budget surplus should be used to cut taxes or increase spending in a recession. Indeed, Milton Friedman, the godfather of the Monetarists, has argued over the last three decades that if the Fed would simply manage the growth of the monetary aggregates, at a steady annual rate of 2½% to 3%, the economy would be hunky-dory, whether there were a deficit or a surplus. If Brit would take the trouble to call around and talk to the Friedmanites, he would find they now OPPOSE even cutting the fed funds rate by another smidgeon, because they think "the money supply" is growing so fast that we are in an inflation.
2. The disciples of the Austrian School would be horrified by Brit's assertion that all economists believe surpluses should be used to put money into people's pockets. There are a variety of Austrians in the school, most of them concentrating on money, credit and banking. I do not know of any that believe the government should attempt to expand a weak economy by putting money into people's pockets, either by fiscal or by monetary policies. If Ludwig von Mises were alive today, he would identify the problem we face as a monetary deflation, which could not be alleviated by tax cuts or a lower overnight interest rates. The late Murray Rothbard, the leader of another Austrian school, would agree with the Monetarists, but would support tax cuts whether there were a deficit or a surplus.
3. Supply-siders. The small number of supply-siders who follow the classical production model are deeply divided on optimum policy, but I do not know any who believe our current problems can be solved by increased government spending; they do not see the surplus as a destructive force.
4. Brit and many other conservative commentators eyeball the $160 billion surplus in Social Security and think it must be a "drag" on the economy. It is somehow reducing aggregate demand and could best be deployed by spending it on programs that put money into people's pockets. We forget that Social Security is a public pension system, whereby workers and their employers put money into a "trust fund" the same way other workers and their employers put money into a private insurance plan. When an insurance company takes in a billion dollars and invests it in "safe" securities, bonds and gilt-edged securities, nobody says those billions are a "drag" on the economy. The $160 billion SSI surplus is being used to buy back government debt. Those who have sold the securities to the government have the $160 billion in their hands and are investing it. Tell Brit to follow the money before he jumps to conclusions. Remember, I'm not singling him out for criticism because he is the worst of the economic commentators, but because he is among the best.