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Chronic Deficit Disorder and how to treat it
After going into remission during 2008-2009, there has been a virulent outbreak of Chronic Deficit Disorder (CDD) in the United States and even more so in Europe. While it is a well-recognized behavioral malfunction, CDD is frequently used to cover a broad range of anti-social activities. Strictly speaking, CDD refers to a morbid and irrational fear of public expenditure exceeding current revenues, and can be distinguished from Acute Deficit Disorder, a delusion that public enterprises should balance expenditures with income (e.g., Vince Cable and the Post Office). A special case of CDD which I shall not consider because there is no known cure is Congenital Chronic Deficit Disorder (CCDD), the loathing of taxation by those with inherited wealth (e.g., David Cameron and George Osbourne).
Over the last year CDD has swept through the Conservative Party (frequently CCDD rather than CDD), where natural resistance is virtually nil, and afflicted almost the entire Liberal-Democrat Party (as might be expected given the absence of preventative measures characteristic of its class clientele). Quite surprising has been infestation in the Labour Party, most notably (but hardly isolated) the extreme case contracted by Alistair Darling. It is therefore encouraging that Ed Miliband seems to have recognized the threat that CDD poses to social order and taken steps at least to limit its spread.
In the United States the rampant spread of Deficit Disorder is extremely worrying, because it has afflicted groups previously immune, Neo-conservatives, Neo-liberals and the filthy rich. During the presidencies of Reagan, Bush I and Bush II, these groups were not merely indifferent, but enthusiastic about public sector red ink. With the arrival of a Democratic President intending to spend on programs other than making war, CDD spread through the GOP with a virulence unprecedented since the Black Death.
With public welfare threatened, it is the responsibility of the healthy to take remedial action. The first step towards containing CDD is that those who suffer from it recognize that they are in the throes of an anti-social malady - that they are ill. This first step involves taking three doses of remedial rationality.
1. Recessions cause public sector deficits
Public expenditure has a slight tendency to increase during recessions and public revenue invariably declines. During recessions unemployment increases and wages decline for many of the employed. The former automatically generates unemployment payments, while the later leads to increases in household support payments, such as food stamps in the United States and various means-tested benefits in Britain. Recessions are by definition declines in income, and taxes decline when income declines. These relationships might strain the mental capacity of a pre-schooler.
2. Public Expenditure Cuts made deficits worse
Declines in household income result in declines in taxes and increases in deficits. Cuts in public expenditure reduce public sector employment and household income. Therefore, cuts in public expenditure reduce public revenue, with the result that at best a deficit does not decline and at worst it increases. If there is a flaw in that logic, no economist has found it.
3. Economic Expansion reduces deficits
Economic growth increases employment and household incomes, which increases taxes and reduces payments to the unemployed and means-tested benefits. The fiscal deficit declines.
Try as one might, it is impossible to avoid the conclusion that endorsing expenditure cuts for deficit reduction is a behavioral disorder. However, except for those afflicted by the congenital form of the malady, it is a disorder that can be treated.
In 1930, J M Keynes warned, "The world has been slow to realize that we are living in the shadow of one of the greatest economic catastrophes of modern history". The same warning applies in 2010, and the slowness to realize the impending disaster is the essence of Chronic Deficit Disorder.
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