Deficits Are Not What They Use To Be

How do government deficits affect the economy in 2020? We need to look at how we see the entire concept of deficit spending as compared to before the Great Recession.

Before the Great Recession, I and many others believed that deficits contribute to inflation. The Fed creates excess dollars to buy government debt. It was assumed that this would crowd out private market borrowing. That along with too many dollars chasing too few goods would result in an inflationary spiral.

I remember when inflation was our biggest enemy before the Reagan/Volker taming of the beast in the 1980s. Prior during the Ford and Carter administrations my company instituted semi-annual CPI increases in our commercial leases, since to wait a year between increases caused the rent to be raised too much at any one time. In 1980 the inflation rate was 13.5%.

Of course, that inflationary spike occurred after the two oil embargos which had absolutely played havoc on the world’s economy. Politicians and the public were screaming about deficits brought on with upward pressure on prices from oil increases. The U.S. had a $79 billion deficit in 1980 ($245.5 billion in today’s dollars) and Reagan ran that year as a deficit hawk.

Volker induced a recession by tightening monetary policy to tame inflation. Reagan’s plan was to cut the tax rate and simplify the tax code to bring more economic efficiency. As an American I thought that was a great idea.