Correspondence

CORRESPONDENCE Megan J. Bowman, editor The U.S. Budget Deficit To The Editor: Professor W. Max Corden's excellent article, "American Decline and the End of Hegemony," (SAIS Review 10:2, Summer-Fall 1990) could have benefitted from his attention to points of view that differ with his basic assumptions on debt and deficits. Omitted were: a distinction between tax rates and tax collections, which might have modified his view of the budget deficit; a discussion of the growth of tax collections and the greater growth of spending during the 1980s, which undermined the debt-reducing effects ofthe tax cuts; an appreciation of the fact that arguably the greatest period of U.S. economic growth—from the 1860s to World War I—came while we were a debtor nation; and acknowledgement that continued foreign lending to the United States reflects the superior quality of U.S. investment opportunities relative to those in other nations . Further, the statement that "there is now almost universal agreement that the deficit, at its present level, is undesirable" fails to appreciate adequately the opposing view. After all, "almost universal agreement " tends to overlook the views of Paul Craig Roberts, Alan Reynolds, Robert Eisner, Alan Meltzer, Robert Heilbroner and Robert Barro, to name a few, which place the deficit in a different context than that constructed by Corden. It should be noted that, although these economists carry a wide variety of ideological baggage, they do not view the budget deficit as a clear or present danger. Moreover, in dismissing the Laffer curve, Corden ignores the reality that it is merely the application of 181 182 SAISREVIEW the "law" of diminishing returns to taxes—with rates being input and collections being output. Keynesians who call it "fantasy" and supplysiders who call it "revelation" all miss this point. Finally, the Coolidge, KennedyJohnson , and Reagan tax-rate cuts prove that rates matter if one is to understand collections. The real argument is not technical or factual, in the view of many; it is, rather, ideological and it centers on the role of government in our lives. Sidney Helfant Professor Kingsborough Community College City University ofNew York Brooklyn, New York W. Max Corden replies: Let me withdraw one sentence from my original paper: "There is now almost universal agreement that the deficit, at its present level, is undesirable." I doubt that there is almost universal agreement on anything , and it is quite true that, for many differing reasons, there are economists who do not think there is, or has been, a problem. I did not put my own view on the deficit in the paper, but let me state it. The federal budget deficit is, indeed, not an immediate problem; if Congress and the president failed to deal with it, there would not necessarily be an economic crisis. It would be an insidious problem if it caused the ratio of federal debt to GDP to rise steadily over a longer period. It has risen sharply since 1981. While it might rise temporarily ifthere is a severe recession, the current indication on the basis of the recent budget agreement is that it will drop. Of course, a positive deficit in relation to GDP of around 2 percent is compatible with the debt-GDP ratio staying constant. The higher the deficit, however, the more the U.S. government draws on the world supply of savings, and this has adverse effects on private investment, both in the United States and abroad. From that point of view, a reduction of the deficit, provided it were not brought about by reducing U.S. public investment, would be beneficial for U.S. and world growth. It is true that if a reduction in the deficit were unaccompanied by appropriate monetary expansion, it could cause a short-run decline in U.S. (and indirectly world) output through reducing demand. There is no reason to believe, however , that U.S. monetary policy would fail to be adjusted appropriately. Finally, a most important consideration is that lower world interest rates would reduce the debt servicing obligations of developing countries. Professor Helfant is correct in noting that economic growth is often associated with foreign borrowing. An unusual feature of the...