The Excuse for the Government to Spend and to Run a Perpetual Deficit Has Taken on Different Forms: “Prime the Pump,” “Theory of Secular Stagnation,” and the “Balance Wheel Theory”

Ever since the New Deal, a primary excuse for the expansion of governmental activity at the federal level has been the supposed necessity for government spending to eliminate unemployment. The excuse has gone through several stages. At first, government spending was needed to “prime the pump.” Temporary expenditures would set the economy going and the government could then step out of the picture.

When the initial expenditures failed to eliminate unemployment and were followed by a sharp economic contraction in 1937-38, the theory of “secular stagnation” developed to justify a permanently high level of government spending. The economy had become mature, it was argued. Opportunities for investment had been largely exploited and no substantial new opportunities were likely to arise. Yet individuals would still want to save. Hence, it was essential for government to spend and run a perpetual deficit. The securities issued to finance the deficit would provide individuals with a way to accumulate savings while the government expenditures provided employment. This view has been thoroughly discredited by theoretical analysis and even more by actual experience, including the emergence of wholly new lines for private investment not dreamed of by the secular stagnationists. Yet it has left its heritage. The idea may be accepted by none, but the government programs undertaken in its name, like some of those intended to prime the pump, are still with us and indeed account for ever-growing government expenditures.

More recently, the emphasis has been on government expenditures neither to prime the pump nor to hold in check the specter of secular stagnation but as a balance wheel. When private expenditures decline for any reason, it is said, governmental expenditures should rise to keep total expenditures stable; conversely, when private expenditures rise, governmental expenditures should decline. Unfortunately, the balance wheel is unbalanced. Each recession, however minor, sends a shudder through politically sensitive legislators and administrators with their ever present fear that perhaps it is the harbinger of another 1929-33. They hasten to enact federal spending programs of one kind or another. Many of the programs do not in fact come into effect until after the recession has passed. Hence, insofar as they do affect total expenditures, on which I shall have more to say later, they tend to exacerbate the succeeding expansion rather than to mitigate the recession. The haste with which spending programs are approved is not matched by an equal haste to repeal them or to eliminate others when the recession is passed and expansion is under way. On the contrary, it is then argued that a “healthy” expansion must not be “jeopardized” by cuts in governmental expenditures.

--Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1982), 75-76.