Deficit Dove

Like almost all businesses, and every small one, LANDCO relies on employed persons with good wages to be our customers. The lion’s share of businesses in this country and around the world can hope for no better development than effective job-creation. In the US, a concerted attack on the deficit today is entirely inconsistent with job-creation.

We know that small business is a major job-creator in our country, but small business is not thriving, and it is not hiring. One thing that we know for sure after the past three years is that private capital is still on the sidelines — trillions of dollars with nowhere to go but into government bonds and insured accounts. That’s why interest rates are falling, not rising. That’s why the dollar has strengthened, not weakened — because our debt is a sought-after investment.

That’s also why there is no inflation and in fact a serious risk of deflation — because private capital is not flowing through the economy and driving up the price of goods. And what is the point of reducing the deficit if not to suppress interest rates, strengthen the dollar and curtail inflation? Right now (not forever) deficit reduction cannot possibly accomplish those purposes, because those purposes are completely uncalled for. Someday? Sure. Everything happens someday. But if we do not focus national policy on stimulating employment, we are flirting with deflation or at best stagnation, which in our estimation will be much more toxic and more immediately toxic than a high federal deficit.

Would a reduced deficit stimulate private investment? No. Profit potential, not public finance, is why people invest. Without robust employment and a lot of wages in circulation, there is far less profit potential. It is a vicious circle. No private investment, so no private employment, so no private investment. And since private investment cannot presently be relied upon for job-creation and economic stimulus, where to turn? Public investment, clearly — but we cannot increase public investment and reduce the deficit at the same time. One has to come sooner and one later. Which is not to say that all public spending is equally beneficial. Our legislators need to study and debate the various projects and purposes on which to spend public money, but they should not, in our

opinion, concentrate on deficit reduction.¹

Until we see inflation running at 5% (some say 4%, but we think they’re too cautious), there is no benefit in deficit reduction.

We would just then be at the point at which people manifestly have money to spend. Why choke that off prematurely? Only when inflation surpasses unemployment as a threat to our economy will it be time to attack the deficit. So how did the Clinton administration curtail the federal deficit and still preside over a strong economy and high employment? In the view of many, the two biggest factors were first that the deregulation of financial services had not yet had time to metastasize and suck so much capital out of the system, and second that George H. W. Bush had acquiesced in a tax increase some years earlier. As a result, Clinton could reduce the deficit substantially with revenues, and not so much with spending cuts, so the economy and employment in particular were not deprived of their governmental component.²

It is an irony of politics that President Bush was repudiated by his own party (and certainly not praised by Clinton’s) for his contribution to a long period of U.S. prosperity. It is a further irony that the most seemingly logical response to the deficit (i.e., to stop spending), will force the economy to a standstill, or worse. Of course, if LANDCO is a “deficit dove” right now, this is certainly not a view held by everyone. LANDCO itself takes an interest in the banking sector, and banks are not as threatened by the prospect of deflation as are real estate investors. That’s one of the reasons causing us to seek diversification, for while banks would like homeowners to be able to repay their mortgages, still, at the end of the day, the largest ones of them have a safety net in the Treasury Department that other businesses do not. The best safety net, however, is a well-employed customer base, and LANDCO, like the vast majority of Main

Street businesses in this country, will benefit far more from that than from a concerted effort at deficit reduction.

1. Here, the exception might be war-spending, which does not circulate very effectively in our domestic economy and which might better be reduced for other good reasons as well.
2. Roughly one in four American workers is employed in the public sector, so government spending in good times and bad gives major support to employment.