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Writes Bill Mitchell,
In 1932, Stuart Chase published his book A New Deal (Macmillan), which became the totem for Franklin Roosevelt’s response to the Great Depression.
Stuart Chase is an early champion of the view that fiscal space (the potential for non-inflationary government spending) is solely constrained by resource availability, and therefore should not be regulated by threshold ratios (as laid down in the Maastricht Treaty for instance) for government outlays and national debt supposedly representing long-term standards of budgetary prudence independent of the prevalent stage in the economic cycle. Government should not be unnecessarily held back in spending on a large scale to fund the public purpose, notably full employment. To the critics of ample government spending Stuart Chase replies (in 1942):
Where’s the money coming from? Out of that one hundred million man-years of work wasted; out of that two hundred billion dollars of production which never was produced. It will come from the same place that the bombers, tanks and battleships are now coming from – out of the full employment of people.
For the time being, I am convinced he is right. I am even convinced that it may not be unusual to register huge unused spending capacity on the part of government, and that for this reason a lot that is beneficial to the individual and her community fails to be provided owing to an unnecessary denial of funding.
However, I shall add on my part, no less important than the recognition of untapped fiscal space is the need to insist that spending is supported by a sound democratic order whose restraints and monitoring capacity will not be easily circumvented.
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I suspect that the idea of modern demand management was greatly inspired by the experience of unprecedented economic extravagance exercised in the two World Wars. The idea of fiscal space has been discovered in the context and for the purpose of war. As Keynes has pointed out in the foreword to the German edition of The General Theory, lavish use of fiscal space is easier to effect in a totalitarian society (or one overwhelmed by a drive toward totalitarian goals) than in a robust democracy, simply because the degree of ideological diversification and political resistance is so much greater in the latter.
Emerging from this tradition, fiscal space has proved to be a two-edged sword that has helped us build the golden age of capitalism (1945-1980), but has also brought about untold misery, carnage, and global conflagration, as the below lengthy quote amply demonstrates. Clearly, the extensive use of fiscal space cannot be recommended without strict conditionality in terms of a democratic-pluralistic order designed to keep our societies open and free.
IN 1925, Russia had been through a devastating war and a violent internal revolution. Her currency had been destroyed in a runaway price inflation, she was the world’s worst financial risk abroad and she had very little gold. Yet by the end of the first Five Year Plan in 1933, Russia had invested some 60 billion rubles in factories, new cities, cities, hydroelectric developments, armaments, houses, schools. There stood the new plant, ugly and solid. Without it Russia could never have met the onslaught of Hitler’s armies.
Where did the money come from?
In 1933 it was freely prophesied that Italy could not invade Ethiopia. She had no credit abroad and almost no gold. The effort would bankrupt her. Italy went ahead, conquered Ethiopia, and emerged without financial collapse.
Where did the money come from?
Hitler took over a Germany which was technically bankrupt. It had defaulted on its foreign obligations. When he proposed to build a powerful army, together with all kinds of grandiose public works, he was laughed at in London and New York. Germany was insolvent, and the whole idea was preposterous. The nations of Europe which have trembled under the thunder of panzer divisions know that Hitler built even more terribly than he promised.
Where did the money come from?
When Japan began to rattle her sword in the direction of Indo-China and challenge the United States and the British Empire, wiseacres said it was a bluff. The long years of the war in China had reduced the Japanese economy to a bag of bones. She was bankrupt and could not sustain a real fight. Yet she opened a new attack with devastating fury, and with military equipment in planes, tanks, artillery, ships, that was as excellent as it was unexpected.
Where did the money come from?
In 1939, the United States Congress declined to appropriate $4 billions for highways, conservation, hospitals, freight cars, in the bitterly contested “lend-spend” bill. It was widely held that the bill would lead to ruin and national bankruptcy. Yet since the fall of France in 1940, Congress has appropriated almost $300 billions for armaments – seventy-five times as much as the lend-spend bill – and a large fraction of it has already gone into tanks and guns. Far from being ruined, our national vitality has never been more vigorous, and great financial moguls assure us that we shall be able to swing the national debt.
Where did the money come from?
After the war America will need to maintain full employment, operate its industries at substantial capacity, provide the essentials of life for all its own citizens, and help foreign peoples who are starving and unable to pay for the supplies. There will be a towering political demand for a world delivered from chronic depression.
Where will the money come from?
It is clear from these examples that what a great nation can “afford” in periods of crisis depends not on its money but on its man power and its goods. Russia, Italy, Germany, Japan, the United States, all used money in the situations mentioned, but money was obviously not the dominant factor. Man power and materials were the dominant factor. Yet at other times, when crisis was not so acute, the money for necessary tasks could not be found. Unemployment, insecurity, want, dragged on. This is a puzzling paradox. At certain times a nation can afford what at other times, with no less money, it cannot afford. At certain times we are afraid of national bankruptcy, and at other times we give it hardly a thought.
Notes Winston Churchill:
A requisition, for instance, for a half-million houses would not have seemed more difficult to comply with than those we were already in process of executing for 100,000 airplanes, or 20,000 guns, or 2,000,000 tons of projectiles. But a new set of conditions began to rule from 11 o’clock onwards. The money cost, which had never been considered by us to be a factor capable of limiting the supply of the armies, asserted a claim to priority from the moment the fighting stopped.
Adds, Bill Mitchell:
11 o’clock was on November 11, 1918, when the peace was declared after WWI.
Chase noted that in the Depression there was idle labour and other productive resources – the “money cost became a brake on the whole economic machine” – despite the availability of these resources and unsold goods.
War is the ultimate common motif which compels us and makes us willing to surrender to one overarching goal; but this is not the condition of civil society, and we should never elevate (though ideologically exalted politics loves to do this) any of the objectives that may arise in civil society to the staus of "the ultimate common motif and the one overarching goal".
I do not know to what extent limiting fiscal space to a level appreciably below non-inflationary feasibility might be a necessary proviso to which civil society must be subjected under conditions of peace and robust democracy.
However, the ultimate challenge to us being engaged in the discourse of political economy is to find a way to use fiscal space to the utmost without turning it into a catalyst of ideological zealotry and totalitarian control.
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