Deficit spending destroys business confidence— causes fear of impaired credit, inflation, and future taxes

Clark (1939) believes there is some truth to Keynes’s claim that deficit-spending can stimulate demand an output, even arguing that it might “produce an industrial expansion,” but the effect would likely “dwindle rapidly and disappear if the deficit spending stops.” “It is highly improbable,” he wrote, “that this form of stimulus can itself serve to initiate a revival that will endure after the stimulus is removed.” In fact, he maintains that “indefinite deficit spending is not an endurably workable remedy for chronic, partial stagnation of an economic system like our own.” Instead of Keynes’s socialization of investment, Clark believes that “a free flow of private investment” is the “prime requisite of success,” and if anything, deficit-spending tends to displace or undermine private investment, by diminishing business confidence. “If businessmen expect the public deficit to continue for a long time and in large volume, they will be affected by fear of ultimate impaired public credit, or of inflation, or, if not these, then at least by fear of burdensome taxes in the future.” For Clark “these are all retarding forces,” and worse, are caused by the same deficit-spending and debt accumulation policies that Keynes wrongly asserted would prove ameliorative. On the other hand, in support of Keynes, Clark denies that public borrowing in the 1930s is crowding out other credit; private sector loan demand and interest rates are too low, he says, to support such a claim. He also denies that the public debt is a net burden to the economy, yet is attentive to disaggregating the effects, a method typical of later public choice analysts; for Clark, while “there is nothing self-limiting about the debt the government is piling up,” and it may seem troubling that the debt “goes on increasing without limit,” nevertheless “it does not represent a net burden of this amount on the economic system as a whole.” Our real concern, he says, should be for the way the public debt “does represent an obligation on Americans as taxpayers to transfer ever-increasing sums to Americans as bondholders.” Oddly, his concern begins only after bondholders have transferred their capital to taxpayers, via the state. But concurring with many prior debt theorists, Clark believes public bondholders are unproductive, or at best, passive financiers of an unproductive entity (government), so any larger role they assume in credit markets due to purchases and portfolio accumulations of public debt “will retard business activity materially.” Clark does not suspect that financiers may be lending to the state only because business activity already is retarded or unsafe. Paying some attention to the actual spending that deficit-spending entails (as did Keynes, who insisted that outlays be restricted mainly to public capital projects, not to mere consumptive transfers), Clark (1939) warns that infrastructure projects are not so easily or quickly launched, nor are they typically sufficient in number or of financial magnitude to make a material difference in a large economy, and worse, they are prone to political patronage and invite wasteful rent-seeking. In short, Clark presciently identifies many of the same risks that seem to bedevil “stimulus” spending schemes to this day. “We have not reached the limit of our debt-bearing power,” Clark contends, “but we do seem to have reached a point at which the piling up of public deficits is a deterrent to private capital outlays,” and unfortunately, the likelihood now (in 1939) is that the Treasury “will be treated as a bottom-less grab bag for pressure-group interests.” Despite voicing this public choice theme (rent-seeking), Clark concludes by tentatively endorsing the usual grab bag of Keynesian ideas – including keeping wage rates “as high as possible” (despite a sky-high jobless rate), ensuring “low interest rates” (even as public bondholders are reluctant to take risks), and imposing confiscatory tax rates to curb “high profits” and preclude “a top-heavy scale of income distribution.” A professor at Harvard since the early 1920s, John H. Williams specialized in trade and monetary theory, but in his 1941 article, “Deficit Spending,” he tackled, for the first time publicly, what seemed to be the linchpin of the Keynesian policy for recovery from depression in the 1930s. The problem, by 1939, was that no real recovery was either visible or foreseeable, despite record peace-time deficit-spending. Keynesians began to argue that recovery was elusive because too small a dose of the new fiscal medicine had been administered, or because, in the phrase of Alvin Hansen (the “American Keynes”), capitalism now suffer from “secular stagnation,” which no mere counter-cyclical fiscal or monetary policy could effectively forestall. More drastic (interventionist) measures would be required, and some Keynesians and FDR New Dealers viewed Europe as a model for new veins of state intervention, including the Continent’s penchant for war. Indeed, Keynes had said, in his General Theory (1936), that war could cure an economic depression, for it could simultaneously lower the jobless rate by conscripting the idle and sending them abroad, eradicate “over-production” by overt wealth destruction, and absorb “excess saving” by huge state borrowing and spending on projects of dissipation. In 1937 Williams had recruited Hansen from the University of Minnesota to Harvard, and the two organized and taught the famous Fiscal Policy Seminar, attended by students, academics, and policymakers, at the new Harvard Graduate School of Public Administration, where Williams served as dean from 1937 to 1947. Although Williams generally opposed Keynesian policies, he also helped Hansen achieve influence and fame, such that he became a world-renowned Keynesian. In “Deficit Spending,” Williams (1941) seems like a proto-public choice theorist, for he treats not only the economics of deficit-spending but the politics behind it (plus the politics resulting from it). He contends that deficit-spending lacks coherence, both logically and economically, that it only became official “policy” by default, in the aftermath of the failure of the Federal Reserve’s earlier low-interest-rate policy, which sought to foster a lasting recovery; now, he argues, deficit-spending is being pursued mainly to rationalize a more expansive economic role for government, and perhaps a more expansive role as well, within government, for its advocates and their interests, within the state, a common aspiration for many academic economists in the 1930s.