*Nobel Memorial Prize Winner William S. Vickrey passed away on
October 14, 1996. This previously unpublished paper appears here with the kind
permission of Mrs. Cecile Vickrey.
Forthcoming in Aaron Warner, Mathew Forstater and Sumner Rosen (eds.),
2000, Commitment to Full Employment: the Macroeconomics of Public Policy of
William S. Vickrey, Armonk, NY: M. E. Sharpe Publishing
THE SO-CALLED "DEFICIT"
We are not going to get out of the economic doldrums as long as we continue to
be obsessed with the unreasoned ideological goal of reducing the so-called
The "deficit" is not an economic sin but an economic necessity.
Its most important function is to be the means whereby purchasing
power not spent on consumption, nor recycled into income by the private
creation of net capital, is recycled into purchasing power by government
borrowing and spending. Purchasing power not so recycled becomes non-purchase,
non-sales, non-production, and unemployment.
A PRIVATE CAPITAL APPROACH TO FULL EMPLOYMENT
We have not had a satisfactory approach to full employment, except in wartime,
since 1926. Over much of this century trends in the ratio of profitable
private capital to national product have been downward, as a result of
capital-saving innovation such as fiber optics, the trend to light industry
away from steel mills and other heavy industry, and the increasing importance
of services. Prospects are that for the foreseeable future the capacity of
private industry to find profitable use for private capital will be not much
greater than two years of gross domestic product.
On the other hand aspirations of individuals to acquire assets to provide for
retirement and other purposes have been growing, due to longer life
expectancy, higher retirement aspiration levels, the loosening of family ties,
the development of expensive medical technologies, and other factors. Current
aspirations appear to be moving towards three years or more of gross domestic
product. This leaves a gap to be filled by government debt of about one year
of gross domestic product.
GOVERNMENT DEBT TO FILL THE GAP THE PRIVATE SECTOR CANNOT
If we aspire to a satisfactory level of full employment by 1998, whereby
anyone not too finicky about the type of work could find a job at a living
wage within 48 hours, this will, if we assume inflation to average about 3%,
call for a gross domestic product of about 10 trillion dollars. To fill the
gap between the asset aspirations of individuals at this level of income and
the ability of the private sector to provide assets, the supply of government
securities would have to rise to 10 trillion dollars, implying a level of
income recycling by governments of about one trillion a year on the average
over the next five years.
PAYING FOR THE DEBT THAT FILLS THE GAP
Once this level is reached, to continue in equilibrium the supply of
government securities will need to grow pari passu with the gross domestic
product, to correspond to the gap between the demand of the population for
assets and the provision of assets by the private sector. Whatever interest
charges on the debt are not financed out of this growth in the debt can more
than be met out of savings in unemployment insurance payments, and the
increased tax revenues derived from the larger national product at rates no
greater than at present. A 10 trillion debt with a full employment economy
will be far easier to deal with than a 5 trillion debt with an economy in the
WHAT IF THE GAP IS NOT FILLED?
If governments fail to fill the gap and meet the demand for assets by issuing
an adequate volume of securities, the attempt by individuals to acquire assets
by non-spending will cause a reduction in sales, temporary investment in
excess inventories, cutbacks in orders, unemployment, and reduced national
income and product. This may be partially offset by the bidding up of asset
values, leading to a certain amount of additional spending out of capital
gains, but the "saving" imbedded in these capital gains does not involve the
creation of new capital or the employment of individuals in construction. The
reduction in interest rates could in principle increase "deepening" types of
investment in labor-saving technology, but after the initial stimulus the
effect on employment tends to be negative. Little "widening" investment is
likely to take place regardless of reduced interest rates if the market for
the product is not there. There is a serious danger that the bidding up of
asset prices could create a bubble of unsustainable values that is likely to
collapse disastrously, as occurred in 1929 after the budget surpluses of the
preceding years. Sooner or later a reduction in production and national income
will set in until the reduction in income reduces the demand for assets to
conform to the supply.
TANGIBLE REAL EFFECTS
Reducing the "deficit" may reduce the debt of the government, but it also
reduces the supply of assets people want to acquire to take care of their
security needs. Reducing the "deficit" does not improve the real heritage left
for the future, rather it impairs that heritage by leaving a legacy of
inexperienced workers, impaired infrastructure, and reduced investment in
plants because of reduced demand for the products, to say nothing of the
impact of unemployment on health, delinquency, crime, and broken
The "deficit" is not even calculated on a businesslike basis. It makes no
distinction between current account and capital account items. If GM, AT&T,
and the nation's households had been compelled to "balance their budget"
calculated in the way the federal budget is calculated, we would now have many
fewer automobiles, telephones, and houses.
INDIVIDUAL SAVING (ABSENT STRONG DEMAND) IS
Urging individuals to save more is counterproductive. Individual saving does
not mean that funds are created out of thin air to put into savings accounts
or the capital market; for most individuals savings is non-spending which
becomes the non-income and reduced savings of the vendor. Funds are
transferred from the bank account of the vendor to the account of the saver,
there is no increase in total money in the bank, and no facilitation of
investment, while reduced market demand will actually discourage investment.
Savings are neither a prerequisite nor an inducement for investment. Rather,
non-spending by reducing market demand lowers incentives to invest.
PROFITABLE INVESTMENT AND SAVING
On the other hand if a businessman can show good prospects for profitable
investment he can nearly always get credit and proceed with the investment,
which will constitute an increase in someone's wealth which is ipso facto
savings. Supply does not create its own demand as soon as some of the income
generated is saved, but investment does create its own savings, and
INFLATION AND FULL EMPLOYMENT
Eventually, in all likelihood, we will have to find some way of dealing with
the threat of an unacceptably high rate of inflation that does not involve the
maintenance of what Marxists used to call "the reserve army of the
unemployed." For the moment, however, that threat seems sufficiently remote
that we could proceed with the first steps towards full employment and deal
with that bridge when we come to it. There has been no dearth of plans for
controlling inflation in ways that preserve the essence of free
WE HAVE THE RESOURCES BUT REFRAIN FROM USING THEM
The administration is trying to bring the Titanic into harbor with a canoe
paddle, while Congress is arguing over whether to use an oar or a paddle, and
the Perot's and budget balancers seem eager to lash the helm hard-a-starboard
towards the iceberg. Some of the argument seems to be over which foot is the
better one to shoot ourselves in. We have the resources in terms of idle
manpower and idle plants to do so much, while the preachers of austerity, most
of whom are in little danger of themselves suffering any serious consequences,
keep telling us to tighten our belts and refrain from using the resources that
lie idle all around us.
ALEXANDER HAMILTON, WILLIAM JENNINGS BRYAN
Alexander Hamilton once wrote "A national debt, if it be not excessive, would
be for us a national treasure." William Jennings Bryan used to declaim, "You
shall not crucify mankind upon a cross of gold." Today's cross is not made of
gold, but is concocted of a web of obfuscatory financial rectitude from which
human values have been expunged.