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Former prime minister Robert Menzies boasted of the "expansionary effect" of a cash deficit.(Supplied: Australian War Memorial)
There's a lot we've forgotten about Robert Menzies.
Take his name, for example.
Younger Australians may not know it, but our country's longest-serving prime minister, one of the founders of the Liberal Party, was nicknamed "Ming".
He was our first prime minister to have two Australian-born parents, but his paternal grandfather was Scottish and he was proud of that heritage.
He preferred his surname to be pronounced the way the Scots pronounce it — Ming-iss — but his attempts to convince his countrymen to do so were in vain.
He received the nickname "Ming" instead.
Then there was his time as prime minister, when he boasted about delivering a bigger budget deficit than Labor would have, for the good of the country.
That's right.
The father of Australia's Liberal Party was proud of spending whatever was necessary to ensure full employment, even when the economy wasn't in recession.
Keynesian logic of Menzies
A speech Mr Menzies gave in August 1962 about his budget that year is worth reading.
He'd won the federal election eight months earlier, defeating the Labor opposition led by Arthur Calwell.
During the campaign, Mr Calwell promised to deliver a deficit large enough to eradicate unemployment, and he figured that meant a deficit of 100 million pounds.
Here's Mr Menzies explaining why he was spending more than Labor pledged.
"We shall pay out to the citizens 120 million [pounds] more than will be collected from them.
"So, far from being timorous — I think that was another of the words used by the deputy leader of the opposition — this is adventurous finance.
"Add to the deficit the tax refunds now being made, and it is clear that purchasing power in Australia this financial year will be uncommonly high.
"The real task of any government today, as well as of the business community and all sensible citizens, is to get that purchasing power exercised."
It was uncomplicated Keynesian logic.
As John Maynard Keynes wrote in 1933: "Look after the unemployment, and the budget will look after itself."
During the years 1946 to 1975, when Australia's federal governments (both Labor and Liberal) pursued a policy of genuine full employment, the unemployment rate was kept below 2 per cent on average.
Mr Menzies' second stint as prime minister lasted from 1949 to 1966.
For his last nine budgets he delivered deficits, and the size of his last deficit, at 3.3 per cent of gross domestic product (GDP), was 0.3 per cent larger than the deficit in Wayne Swan's last budget in 2013.
So why wasn't the public angry?
Because Australia's economy, like economies in other western nations, grew strongly in the post-war period.
In the 1940s, its average growth rate was 3.8 per cent.
In the 1950s, it was 4.2 per cent.
In the 1960s, it was 5.3 per cent.
And that constant growth meant the size of Australia's government debt relative to the size of the economy (the ratio of debt-to-GDP) shrank dramatically, too.
All while the government was handing down budget deficits.
Employment push more in line with today's Greens, Labor
Keynesian economists would say those governments were doing what governments should: using their spending power to cover any shortfalls in growth left by the private sector, to support as much employment as possible and boost growth.
At the end of the war in 1945, Australia's government debt-to-GDP ratio was 120 per cent. By the mid-1970s, it had fallen to roughly 10 per cent.
Look after unemployment, and the budget looks after itself.
In that same speech in 1962, Mr Menzies said his government had a number of objectives.
"The first item in our policy … is to build up Australia's population," he said.
"An increased population is vital to Australia. Whatever fluctuations may have occurred in our population, let me remind honourable members that in 1949 the population was a little more than 8 million, but today it is well over 10,500,000.
"Our second great objective is to maintain full employment of man-power and resources.
"The two things must go together if we are to develop Australia."
He listed some of the major infrastructure projects, like the Snowy Hydro scheme, that had taken place under his government (while he was delivering deficits) and said he didn't accept the "artificial division" between the public and private sectors.
"We look at the works programmes of the states and we think they are very good programmes. They are very good indeed," he said.
"Without them and without our works programme, private industry could not grow. It could not employ people. It could not see them housed and provided with transport, schools and all the amenities of a civilised society."
He said his next great objective was to oversee a "steady and strong growth" of manufacturing.
"Because manufacturing is one of the essential conditions of full employment in a growing population."
He also argued why full employment was vital.
"Full employment is not an artificial idea or something to be achieved by some sleight of hand, by some artifice on the part of a government," he said.
"In other words, you can look at full employment as if it were a theory, or you can look at it as the desired end of a great co-operative effort throughout the country — an effort in which action is productively directed and people are productively employed."
You wouldn't blink if you heard a modern Greens or Labor politician speak that way, but a Liberal leader?
From embrace of deficits to 'living within our means'
Younger Australians, those born from the 1980s onwards who came to political consciousness in the Howard years and after, may be surprised to hear that our federal politicians used to boast about the size of their budget deficits during periods of economic growth.
The constant political messaging in recent decades about "debt and deficits" and the need to "live within our means" (from both the Coalition and Labor Party) has primed voters to think about government spending in extremely narrow terms.
The global economy today is obviously radically different from the post-war period, so it would be impossible to copy-and-paste Ming and his opponents' budget measures.
But it doesn't mean we should forget them, either.
At the beginning of his prime ministership in 2018, after years of internecine warfare, Scott Morrison took his colleagues to the birthplace of the modern Liberal Party, in Albury on the New South Wales-Victoria border, in a bid to remind them of their roots and convince them to work together again.
He spoke of Mr Menzies' legacy — but not of his deficit spending that contributed to the growth of Australia's middle class and rising national wealth.
Today, a generation of Australians may have learned to think budget deficits are synonymous with economic mismanagement, but deficit spending, historically, has been as Liberal as the colour blue.
The Stock Bubble Created the Budget Surplus: Not Bill Clinton's Tax and Spending Policies
Bruce Bartlett is a decent person and an honest economist. A former Reagan and Bush I administration official, he now regularly berates Republican politicians for making nonsensical assertions about the economy. However in his NYT blogpost today he may go a bit overboard in telling readers:
“The projected surplus was primarily the result of two factors. First was a big tax increase in 1993 that every Republican in Congress voted against, saying that it would tank the economy. This belief was wrong. The economy boomed in 1994, growing 4.1 percent that year and strongly throughout the Clinton administration.
The second major contributor to budget surpluses that emerged in 1998 was tough budget controls that were part of the 1990 and 1993 budget deals.”
This leaves out the main cause of the budget surpluses at the end of the decade, the stock bubble.
This point can be easily seen from examining the Congressional Budget Office (CBO) projections from May of 1996 for the 2000 fiscal year. At that time, the Clinton tax increases were all passed into law, so these were fully incorporated into the budget projects. So were the spending restraints.
So what did CBO tell us? Its projections show that in the spending constraint scenario (discretionary spending would only rise in step with inflation) the deficit would be equal to 2.7 percent of GDP in 2000 (Summary Table 3). Instead we had a budget surplus of 2.4 percent of GDP (Table 1-1), a shift of 5.1 percentage points.
In today’s economy this would be equivalent to an unexpected drop in the annual deficit of $780 billion. This shift $780 billion drop was not due to policy changes but rather to the extra growth and tax collections spurred by the stock bubble.
On the tax side, we see that CBO projected that revenue would be equal to 18.6 percent of GDP in 1996 (Table 2-3). It turned out that revenue in 2000 was equal to 20.6 percent of GDP (Table 1-2). This differences of 2 percentages of GDP was not due to any change in tax policy, it was due to faster than expected growth and the large amount of capital gains taxes collected as a result of the bubble. (It is likely that some of the capital gains showed up as ordinary income and were taxed as ordinary income. This could explain the jump in the statistical discrepancy at the end of the 90s and the unexplained rise in tax collections in those years.)
On the spending side, non-interest outlays ended up being 15.9 percent of GDP (Table 1-2), they had been projected at 18.2 percent of GDP in 1996 (Table 2-5). While there were some factors that lead to lower than expected spending, most notably slower than projected growth in health care costs, by far the biggest reason for the drop in spending as a share of GDP was the faster than projected growth in GDP.
In 1996, GDP was projected to be $9,094 billion in 2000 (Table 1-2). It ended up being $9,828 billion (Table 1-2). With GDP 8.1 percent higher than projected, the same level of nominal spending would be 8.1 percent less measured as a share of GDP. This means that if we spent exactly the same number of dollars projected in 1996, then spending would have ended up as 16.4 percent of GDP in 2000 rather than the 18.2 percent projected.
The remaining factor was the lower than projected interest payments. Because deficits were lower than projected in the years 1996-1999, interest on the debt only cost us 2.3 percent of GDP rather than the 3.1 percent projected in 1996.
In short, the hero of the budget surplus story was the stock bubble, not President Clinton’s tax cuts and budget restraint. This is important not only in dishing out praise for the surplus, it is also essential to a proper understanding of the economy.
Bubbles are not sustainable, by definition. The stock bubble began to burst in 2000. By the summer of 2002 stocks had fallen to roughly half of their peak values destroying $10 trillion in wealth. This gave us a recession which, although officially short and mild, led to the longest period without net job creation since the Great Depression (until the current downturn).
The ending of this bubble was the biggest factor turning the surplus into a deficit. The Bush tax cuts were very much secondary in this picture, as were his wars and the Medicare drug plan. The Bush administration might deserve serious grief for all three of these, but they were not the story of the end of the Clinton era surpluses. The end of the stock bubble was the end of the budget surpluses and that one cannot be blamed on President Bush.
[Addendum: I see from the comments that I may have to do some real Clinton bashing. A few simple points here.
1) The 1996 projections took account of all the steps Clinton took to balance the budget. All the deficit reduction beyond this was due to the bubble.
2) The pick up in productivity growth, which began in the middle of 1995 (long before balanced budget glory), continued all through the Bush years. Anyone who wants to claim Clinton’s balanced budgets spurred the surge in productivity, which was then destroyed by Bush deficits has a really big quarrel with the data. The story doesn’t fit at all.
3) The deficit did fall sharply under President Bush as the economy recovered from the 2001 recession, until the collapse of the housing bubble brought on the recession in 2008. Yes, the deficit was brought down by housing bubble driven growth. On the other hand, in the absence of this bubble, the downturn from the collapse of the Clinton era stock bubble would have lasted longer. Blame who you like on that one, but them’s the facts.
Anyhow, I’m not getting paid by either side in this story. I have been using the same analysis of the economy for the last 15 years. If that proves inconvenient for supporters of President Obama or Clinton that is their problem.]
