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The View From 1959



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A popular game these days is to pick a previous economic downturn and examine its parallels or differences with the current one. One example is the debt mini-crisis of 1959, when a February offering of long-term Treasury bonds was undersubscribed and the government had to scramble to avoid running short on money. President Eisenhower asked Congress to increase a statutory ceiling, in this case on interest rates, and the opposing party, emboldened by the previous fall’s election, milked the situation for all it was worth.

Superficial similarities aside, this was a very different situation from the one we face today. The reason long-term Treasury debt wasn’t selling was because the economy was starting to recover from a recent recession, and in an expanding economy, investors could get more from other investments than the maximum 4.25 percent Uncle Sam was allowed to pay. So economists worried, politicians fulminated, and investors put their money elsewhere until Congress bowed to the inevitable and lifted the ceiling the following year.

While pleading with Congress, Eisenhower and his Treasury secretary, Robert Anderson, also addressed the problem by “battling . . . hard to balance the budget.” Months before, Eisenhower had written in a memorandum that “in view of the fact that we are already spending more than 8 billion a year for interest alone, without any amortization, the scope of this problem and the rates of interest that we have to pay are, to say, the least, serious.” He recorded that Anderson and Raymond Saulnier, chairman of the Council of Economic Advisers, “both agree that a balanced budget would have the most salutary effect on our fiscal situation that could be imagined.”

This was not just a question of living within the nation’s means, avoiding a burden on future generations, and preventing bondholders from controlling government policy; it was a way to reduce the need to borrow when doing so became more expensive, and to decrease the reliance on short-term debt, which tends to fuel inflation. Then as now, budget balancing (or at least deficit cutting) was not just a moral or strategic issue, but a tool of economic policy.

And that’s why small government is good economics: Not just because big government spends money unwisely, suppresses market forces, and creates a drag on investment and production, but because the fewer entitlements and mandatory payments the government has to make, the easier it is to balance the budget when necessary to keep the economy from stalling. Even if Barack Obama were as much of a deficit hawk as Eisenhower, he would not be able to bring the budget anywhere near balance without severe, radical cuts that would be politically impossible, which is why he is forced to rely on remedies like stimulus and quantitative easing. Moral issues aside, budget cutting is a tactical weapon that policy makers surrender when only about a fifth of the budget consists of discretionary payments, and having to do without this weapon can prolong an economic downturn.



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