Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 5, 1995 TAG: 9503040042
SECTION: EDITORIAL PAGE: G-3 EDITION: METRO
SOURCE: GEOFF SEAMANS ASSOCIATE EDITOR
DATELINE: LENGTH: Long
STRANGELY absent from the debate over a balanced-budget amendment, rejected last week for want of one more U.S. Senate vote but sure to come up again before the next election, was this question: Why are balanced budgets something to strive for?
Instead, the issues were whether fiscal policy is the sort of thing you ought to put in the Constitution, whether the amendment would actually result in balanced budgets, whether it would expand the power of unelected judges, whether Social Security benefits should be immunized from its provisions, etc., etc.
The notion that balanced budgets are inherently good is simply assumed, as if it were revealed truth. This seems strange to me because orthodox economics, as I understand it, holds that deficits are useful fiscal tools - capable like most tools of misuse or abuse, to be sure, but in themselves neither angelic nor evil.
Nevertheless, worshippers continue to throng to the altar of zero-deficit zeal, scarcely noticing the weakness of the reeds on which it's built.
Three oft-heard assertions that are just plain mistaken:
People have to balance their personal budgets; the federal government should balance its budget.
Wrong on two counts. Individuals, wisely and deliberately, often don't balance their personal budgets. And countries aren't individuals.
In each of my four years of college back in the '60s, I ran up deficits that I covered by borrowing. In each of the two years in which my wife and I bought a house, our outlays exceeded our income by thousands of dollars. When we've bought new cars by dipping into savings from prior years or taking out loans to be repaid in future years, we've engaged in deficit spending.
All this is remarkable only for its utter unremarkableness. Who hasn't done much the same? Yet, people persist in thinking that comparing federal to personal finances is somehow an argument against deficit spending.
Moreover, nations are not individuals, with finite life spans and changing financial needs as they age. Nations are, rather, aggregates of people - some in retirement, others in childhood; some just beginning their careers, others in their peak earning years.
This stuff tends to average out. A government, unlike an individual, can run chronic deficits without going bankrupt. On the other hand, a government that in a single year spends more than double its income - which individuals often do when they purchase homes - is in serious trouble.
States (and businesses) balance their budgets; the federal government should balance its budget.
Wrong again. Growing businesses routinely spend more than they take in, plowing borrowed money into plant and equipment to increase their competitiveness and future profitability. State and local governments routinely spend more than they take in, by issuing bonds to pay for long-life construction projects.
In return for such spending, they acquire nonfinancial assets of enduring value. States can say they balance their budgets year after year only by amortizing the cost of capital outlay paid for by bonds. When the federal government does the same thing, however, it counts toward its deficit.
Modest or occasional deficits might be OK, but you have to require a balanced budget so politicians won't let the deficits get out of control.
Agreed, deficits have been too big for the past decade and a half. But out of control? Not exactly.
First, deficits, while still too big, have lately been getting smaller. Second, and more important to the point, the big-deficit era didn't come about by accident. Rather, it's the result of deliberate policy decisions in the early years of the Reagan administration.
Until Reagan, America's post-World War II federal deficits tended to run in the range of 2 percent or below of the gross national product - low enough to keep the level of public debt to about a third of the GNP. Indeed, between 1970 and 1980, the debt actually fell, from 36 percent to 34 percent of GNP.
But in the early and middle '80s, Reagan budgets ran up deficits of more than 5 percent of GNP. The national debt started a steep climb and only now, with deficits dropping into the range of 2 to 3 percent of GNP, is leveling off - though at double the percentages of GNP of 15 years ago. Just servicing the debt now amounts to roughly 15 percent of federal outlays, up from less than 10 percent in 1980.
During the 1980 presidential campaign, the American people were treated to the counterintuitive - but wonderfully convenient - notion that lower taxes would inspire so much economic growth that deficits would take care of themselves. We should've stuck with intuition.
Thus does time fly. From the crackpot "deficits don't matter" economics of the early Reagan years to the crackpot "deficits are evil incarnate" constitutionalism of the Newt Age has taken less than half a generation.
That both viewpoints are dubbed "conservative" suggests that a lexicological oil change is overdue.
by CNB