There is a war going on within the economic community as to whether to deficit spend or balance the budget. The thing that is missing in this debate is context.
From The Reagan Revolution - PaulNathan.biz–
"Ronald Reagan, who few knew was a student of classical economics, initiated a radical reversal of the status quo policies of his day. When Mohamed Ali beat Joe Frazier and won over a million dollars, 91% of his prize was taken in taxes. Reagan reduced that top tax rate to 33% and reduced the lowest tax rate to 15%. He condensed 14 tax brackets into two.
The critics of this tax cut pointed to the resulting rise in deficits, which would triple the national debt during Reagan's term. There were fears that it would raise interest rates as government borrowing crowded out private capital. Instead interest rates fell. There were fears that inflation would rise and the dollar would fall due to deficit financing, but again, inflation fell while the dollar strengthened.
Naysayers feared the Government would not be able to pay its bills if taxes collected went down and debt owed went up. But tax receipts increased higher than ever before. Fears that we would fall into a deep depression not only didn't materialize, but the opposite happened. The US entered into a period of unparalleled prosperity. The stock market soared 300% during Reagan's term as President. Then went up an additional 350% after his Presidency.
What explains this apparent contradiction of theory versus fact?
There are three ways to pay for Government: Taxation, inflation, and borrowing. Of the three, only borrowing is voluntary. When government taxes, it is taking money by force. Another word for that is theft. When the Government inflates, it artificially increases the money supply thereby diluting individual’s money which usually leads to higher prices. This is fraud, and also theft. But when the government borrows (runs a deficit) and accumulates debt, that is a voluntary act. The first two methods of financing government are coercive, and entail both forceful theft and fraud. The latter does not.
Faced with only bad choices, Reagan chose the least intrusive and most moral. How was his decision to borrow less intrusive and more moral? First, when the government sells bonds to raise money, it has to offer an interest rate a willing lender will find attractive enough to act on. Again, this transaction is completely voluntary. Second, while taxation and inflation hit everyone whether or not they can afford them; lending comes only from those who can afford it. And third, even though the government promises to repay its debts to all lenders, if it should ever default, it is the voluntary investors who would suffer the brunt of that default. By loaning to the government lenders also have the additional risk of default by inflation.
Ronald Reagan had to make many tough decisions about how to get the country out of its worst recession since the great depression. He did not choose to cut government spending in a time of recession and high unemployment. He did not choose to raise taxes in a time of excruciatingly high taxation. And he did not inflate in a time of impending monetary collapse. Instead he went to the investors of the nation and the world, and asked them for a loan. Reagan's decision to run deficits was not his greatest vice as claimed by critics, it was in fact, his greatest virtue."
Today, the situation confronting Donald Trump is very similar to that facing Ronald Reagan. And again the most conservative of Republicans are rebelling against the prospects of higher deficits. But history shows that deficits declined over Reagan's term and beyond. President Clinton had the good sense to continue Reagan's formula, and by the end of his term and with the help of Newt Gingrich balanced the budget.
It took over a decade to get there, but through slowly reducing the growth of government spending to the point where President Clinton announced, "I pledge to end the welfare state as we know it", brought the budget into balance. It was the combination of lower tax rates, (Clinton lowered the capital gains tax to new lows), higher growth rates creating higher government receipts and dwindling government expenditures in real terms.
Deficits are not in and of themselves destructive -- no more than businesses borrowing money to expand is destructive. It is a fact that the more wealth on average individuals accumulate the more debt they accumulate. But it is always the ability to service that debt that makes the difference between good debt and bad debt.
Today, what confronts America is the need to redirect government receipts away from wasted or unworkable programs to essential programs. That in itself will help reduce government spending. And many programs can be run more efficiently by returning the tasks of government over to the cities, counties, and states. It is on the local level that you get the most bang for the buck.
I am for a balanced budget. But Like Ronald Reagan, I believe the best way to achieve one is over time as the economy can gain strength to support one. In this anemic economy we don't want to make things harder on Americans, but better for them. We need to build up our strength and then the muscle to make this economy strong enough to endure serious cuts, which are desperately needed, especially in the area of entitlements.
This process is not only doable it is not even an economic problem. It has been done many times before in this country and around the world throughout history. It is a political problem. It is the refusal to recognize simple math and the dire consequences of not dealing with our problems. Instead we take the irresponsible path and call for massive amounts of additional spending on social problems ignoring the hardship that it will bring down on America in days to come.
All one needs to combat this call for increased spending, is to point to the failure of these proposals to achieve their goals. Look at the state of education after throwing the most money in the history of mankind at the problem. And simply look at the results of doubling the national debt in the last eight years. We have the additional 10 trillion dollars’ worth of debt we've accumulated to service, but nothing to show for it. Yet we are told we need to pay more.
Let's do what worked it the past under Presidents Kennedy, Reagan, and Clinton. Let's reduce tax rates, controls, and regulations, and allow the maximum amount of freedom possible to our citizens. We need to return freedom and responsibility to the individual, and get government out of our economy and personal lives.