The Debt Deal

So, the United States will not default on its debt—we think.

As part of the deal negotiated over the weekend by Republican and Democratic leaders (and, at this hour, still working its way through Congress) a bipartisan congressional committee will look for $1.5 trillion in deficit reduction by Thanksgiving. If they fail to come up with anything, then we get to experience more than $1 trillion in automatic spending cuts.

Every set of circumstances is unique, so a principle that might apply to one situation might not apply precisely to another. This is all the more true in an economy that is struggling through the worst recession since the 1930s and failing to create many jobs—a condition that, as we’ve noted, greatly concerned Peter Drucker. Still, Drucker did lay out some broad ideas about budgets and budget shortfalls that continue to be relevant.

US House of Representatives in session, 1911. Image source: US Library of Congress

The first was that government can’t do a great deal to encourage private spending, but it can do one important thing to alleviate downturns: spend money on fixing roads, rails, bridges, public buildings and so forth. “The one effective way to counteract a depression—that is, a prolonged period of structural change—is through investment in the infrastructure,” Drucker wrote in his 1993 book Post-Capitalist Society. “And after prolonged boom periods, the infrastructure . . . is always in bad repair.”

[EXPAND More]However, running a deficit to do this was bad news. “For governments to be able to finance such investments requires that they operate with a balanced budget during good times—and during recessions as well,” Drucker cautioned. “Governments have to learn again to keep deficits as the weapon of last resort. In peacetime, deficits should be used—if at all—only to finance permanent improvements of the economy’s wealth-generating capacity.”

Does that mean Drucker would approve of the new cuts coming to our national budget? Not necessarily—especially not if they were just automatic. “The ability of a management to stay within its budget is often considered a test of management skill,” Drucker lamented in The Practice of Management. “But . . . the late Nicholas Dreystadt, head of Cadillac and one of the wisest managers I have ever met, said to me once: ‘Any fool can learn to stay within his budget. But I have seen only a handful of managers in my life who can draw up a budget that is worth staying within.’”

Is the current budget deal good for the long-term health of the United States economy?[/EXPAND]