Vickrey on Budget Deficits

An email correspondent reminds me of the Nobel Prize winning economist who campaigned for larger budget deficits:

Prof Mankiw,

I am a non-student fan of yours. I enjoy your blog immensely. Given that much of your postings there recently discuss budget deficits, I was wondering what you make of Vickrey's view that deficits should be substantially higher to recycle savings. Was Vickrey a kook that should have stuck to his bailiwick of congestion pricing? If not, what changed that guys like DeLong are now so deficit hawkish? Thank you.

[name withheld]

William Vickrey was indeed a defender of large budget deficits. In 1996, in what is perhaps his last written work, he wrote:

Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.

Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity.

In short, Vickrey thought that the U.S. economy suffered from a chronic problem of insufficient aggregate demand and that deficit-financed spending was the remedy.

You might wonder how large Vickrey wanted budget deficits to be. When he won the Nobel in 1996, he was interviewed on CNN. Here is part of the interview:

JAN HOPKINS: You have some controversial views. You think that the federal government should not be reducing the deficit but rather working on getting the unemployment rate even lower than it is today. [Unemployment was 5.2 percent in October 1996.]

WILLIAM VICKREY: Yes, in fact, the figures work out very roughly that for every $10 billion of deficit, which should really called the $10 billion reduction in the government creation of purchasing power - I'm getting tongue-twisted - creation of purchasing power - then, that means there's a $10 billion reduction in purchasing power, there's $8 billion reduction is sales, there's $8 billion eventually reduction in employment, and 100,000 employees out of work.

JAN HOPKINS: But if you work at getting unemployment down, then you have people spending money and the economy would be better off in your view.

WILLIAM VICKREY: Yes. In fact, what I would like to see is a budget deficit of about $500 billion averaging for the next five years, until we get from 5 percent unemployment down to 1 percent unemployment. Then we would-

JAN HOPKINS: -Very controversial views-

WILLIAM VICKREY: Then, then-

JAN HOPKINS: -Unfortunately we've run out of time.

He died a few days later.

Was Vickrey a kook? Advocating $500 billion deficits in 1996 certainly sounds kooky. Correcting for inflation and real growth, that would be about $800 billion today.

But no, he was not a kook: He was one of the last hard-core Keynesians, far more Keynesian than so-called new Keynesians like me, and maybe more Keynesian than Keynes himself would have been. In the view of most mainstream macroeconomists today (a group in which I include myself and Brad DeLong), insufficient aggregate demand can be a problem for short periods of time, as it was during the recent recession, but it is not a chronic problem facing the U.S. economy. It is not a problem we face now; the Fed is raising interest rates because it is concerned about excessive aggregate demand.

I should note that Vickrey's Nobel Prize was given for his contributions to the microeconomic theory of auctions, not to the macroeconomic analysis of fiscal policy.