Bruce Bartlett

Last week's announcement that the federal budget deficit will reach $455 billion this fiscal year (which ends on Sept. 30) brought predictable denunciations from the Democratic side of the aisle. It's not so much that Democrats care about deficits -- after all, they are the party that invented deficit spending -- they just want to score points against the Republicans.

I don't blame them. In their shoes, I would do the same thing. I wrote many a press statement denouncing Democratic deficits during the Carter administration, when I was a young Republican staffer on Capitol Hill. Although I never thought deficits mattered very much, I knew that there were many people out there who did. So, lacking anything else to say, we Republicans attacked Carter's deficits.

The problem was that although most people think deficits are terrible, they are even more opposed to any measure that will actually eliminate them. Huge majorities were against tax increases or any particular cuts in spending to bring deficits down. Thus, while Republicans felt good about themselves for being fiscally responsible, they gained no electoral advantage whatsoever.

It wasn't until 1980, when inflation and interest rates both reached double-digit levels, that the deficit issue had any electoral potency whatsoever. That is because there was a plausible case to be made that deficits were inflationary, as well as raising interest rates by crowding out private borrowers from the market.

The problem is that it just wasn't true. Inflation is exclusively a monetary phenomenon. It results when the Federal Reserve creates too much money. That is the one and only cause of inflation -- meaning a sustained rise in the general price level. Individual prices go up and down continuously. But the overall level of prices cannot rise unless initiated or accommodated by the Fed.

Inflation was also the principal cause of higher interest rates at that time. Borrowers knew full well that the debt repayments they received in the future would be reduced, in real terms, by inflation, so they demanded an inflation premium in interest rates as compensation. Long-term rates in particular rose percentage point for percentage point with inflationary expectations. Thus, if a mortgage rate would have been 4 percent with zero inflation, it would be 12 percent if 8 percent inflation were expected.

Therefore, both inflation and high interest rates resulted from the same basic cause: Federal Reserve policy. Whatever impact deficits may have had was very small by comparison.


Bruce Bartlett

Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.

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