The Deficits: How Big? How Long? How Dangerous?
Federal fiscal policy is adrift without a rudder. Norms that guided presidents and Congresses in the past have been ignored, and no workable new principles have emerged. Neither is there any consensus in popular opinion, among business and financial elites, or among economists.
The ancient orthodox norm was annual budget balance. It still commands ritual lip service, even from an administration and Congress that have doubled the federal debt in five years. Ronald Reagan, while presiding over deficits of unprecedented size, supports a constitutional amendment forbidding deficits; most members of Congress, though in the House not the necessary two thirds, find it politic to vote for it.
The goal of an annually balanced budget, to be sure, is now enshrined in the Gramm-Rudman-Hollings law, which is now governing budget making despite the Supreme Court decision against one of its procedural steps. The law prescribes a schedule that would reduce deficits to zero in 1991 and thereafter. However, it is unlikely that the Gramm-Rudman law will restore budget balance. Hitting its target would require, in 1991, a surplus of about $120 billion, 2 percent of GNP, of federal revenue over expenditures, apart from payments of debt interest. Revenue now falls short of expenditures, other than interest payments, by more than 2 percent of GNP. Given the impasse between the President and Congress on how to meet the Gramm-Rudman deficit reduction schedule—whether by tax hikes, defense economies, or cuts in civilian outlays—the schedule cannot be met without invoking the mindless, automatic, “across the board” cuts Gramm-Rudman prescribes, which both sides would find intolerably destructive.
To balance the budget may seem a natural and simple rule—far from it, as Professor Eisner cogently and clearly explains. He stresses three defects in conventional federal budget accounting: capital expenditures (e.g., for land, roads, and buildings) are not distinguished from current outlays, a practice that would put most business, households, and state and local governments in apparent deficit too. No allowance is made for appreciations and depreciations in the market values of federal assets (e.g., loans, lands, and mineral rights) and debts. Full interest on Treasury securities is charged as expense even though a large part of that interest may just be compensation for inflation, which lowers the real burden of the debt. (I return to this issue of “inflation accounting” below.) There are other, technical reasons too. Anyone who thinks the rule could be frozen into the Constitution in a short amendment will learn better by reading Eisner’s book.
The idea of annually balancing the budget was long ago discredited by serious examination and by experience. Why annual? Why not monthly, or biennial, or across a business cycle? Efforts to keep government budgets balanced during cyclical declines in business activity proved futile during the Great Depression, notably in the United States under Hoover and in Germany under Bruening, where they hastened the end of the Weimar Republic.…
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