Academic journal article Atlantic Economic Journal

Expenditure and Deficit Policy: An Analysis of the William E. Simon's Rules

Academic journal article Atlantic Economic Journal

Expenditure and Deficit Policy: An Analysis of the William E. Simon's Rules

Article excerpt

"The proposals to limit spending and balance the budget are sometimes discussed as alternatives, but in my mind, they are not."

William E. Simon. Speech before the Mont Pelerin Society. Hoover Institution, 1980, p. 30.


William E. Simon viewed the economy of the 1970s and early 1980s as not "just sick but that every vital organ was threatened ... the very life of the American economic system was in danger" [Simon, 1978, p. 88]. At that time, the United States was faced with a slowdown in production, high and rising unemployment, double-digit inflation, trade deficits, budget deficits, and, in Simon's view, an artificially strong dollar and out of control government spending. Simon stressed the need to" regain fiscal control by saying no to an ever-growing government sector and removing from the hands of policy makers the power to enact measures that seek short term temporary relief from current economic ills at the expense of long term economic stability. Referring to the above economic developments, Simon, in his speech before the Mont Pelerin Society, Hoover Institution, 1980, stated [pg. 1-2]:

   "while (these) economic issues are of crucial significance the
   actual public policies will not be determined by considerations
   of fiscal spending, taxation, the growth of money and credit,
   regulatory and administrative actions affecting productivity, or the
   economic aspects of energy policies. Nor will the policies adopted
   focus on the long-term goals of society which has traditionally
   expected stable prices, employment opportunities, real economic
   growth leading to rising personal standards of living, and strong
   trade and dollar positions in the world economy. The reality is that
   political considerations pointing to the next election will dominate
   the economic policy position. As a result governments focus on the
   realities of the election process and economic policies are
   manipulated to meet short-term political goals."

Concern over the state of the political economy led Simon to recommend the adoption of rules to govern public policy. Without rules, he argued, the realities of the political process would lead to the implementation of policy measures meant to ensure reelection. In the face of economic hardships brought on by a slowdown in production and a resulting rise in unemployment, governments, both conservative and liberal, would be quick to succumb to "excessive fiscal and monetary stimulus" [Simon, 1980, p. 8]. Simon proposed five rules to be implemented (see "Introduction" in this issue). Two of these rules deal with the budget posture. The first rule advocates a budget balance; the second sets limits for the level of federal spending as a percentage of GDP.

This paper will proceed as follows. Section two will spell out the underlying philosophy behind the rules. Section three will present data on fiscal deficits and spending over the period 1965-80. The extent to which fiscal action had departed from Simon's recommendations, and the link between deficits and economic growth, and whether or not deficit spending was financed through the creation of money are discussed also in this section. Section four examines Simon's concerns in light of the data presented. Section five is the conclusion.

Call for a Balanced Budget and a Limit to Federal Expenditures

In a speech before the Mont Pelerin Society and in his book, A Time For Truth, Simon highlighted those events that motivated his call for a balanced federal budget and for setting a limit on federal expenditures. Back in 1930, spending by federal, state, and local governments accounted for only 12 percent of GDP. By 1976, spending has risen to 36 percent of GDP. If this trend were to continue, Simon projected, spending would increase to 60 percent by the year 2000. Government expenditures, in terms of dollar amounts, were unequivocally out of control. …

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