Does the Deficit Matter?
Now that President Clinton is on board the balanced budget train we've achieved a rare bipartisan national consensus on the issue. Which is truly remarkable. For there is not a shred of evidence to support the need for a dramatic reduction in the federal deficit. Let us begin with a simple yet widely overlooked fact. The U.S. government borrows from the American people. Therefore the increased debt of the federal government translates into increased assets by the American people. Senator Warren Rudman (R-NH) loves to point out that every newborn baby starts life with a debt of $17,000. One might just as accurately note that every baby is born with $17,000 in treasury bills in its savings account. Those who view the deficit as public enemy number one argue that increased government borrowing fuels inflation, crowds out private investement and drives up long-term interest rates. To such arguments Robert Eisner, past president of the American Economics Association and author of The Misunderstood Economy, calmly responds, "The data does not confirm the theory." The federal debt tripled in the 1980s yet the annual inflation rate was cut in half. The Treasury issued more bonds to fund ballooning deficits in the 1980s and early 1990s while interest rates on long term bonds fell by a third. Private sector borrowing has increased at a faster rate than federal borrowing. In fact, in 1993 net borrowings by America's households alone surpassed borrowings by the federal government. Eisner, a professor at Northwestern University, and the author of The Income Systems of Account, which analyzes government spending, says that when all is said and done the key question is, "What is the impact on the economy? What is the impact on me?" Expanded federal borrowing increases demand.That in turn boosts employment and purchasing power and fosters higher private investment. When the federal government borrows it does not need to tax.The U.S. has the lowest tax burden of any major industrialized nation. Given these facts, why has the deficit become the nation's number one bogeyman? The key problem is that we are talking very big numbers here. Big numbers scare us. The national debt stands at nearly $5 trillion. It is growing by about $750 million a day. Politicians and reporters feed our fears by insisting that the magnitude of those numbers alone is evidence of a national crisis. They're wrong. In a growing economy with a growing population everything grows, including public and private debt. It is not the absolute level of the federal debt and deficit that is important but their relative levels. The federal debt as a percentage of gross domestic product is about the same as it was in the l950s. The deficit is about the same as it was in the 1970s. The percentage of federal spending as a portion of the national income is the same as it was in the early 1970s. Eisner offers an impressive array of data to support his belief that over the long term both debt and deficit should remain a constant proportion of the national income and federal spending. In prosperous times the deficit should grow more slowly than the economy. In recessions it will grow faster. When measured against this guideline, we're on the right course. The federal deficit, as a proportion of federal spending, has been declining for several years and is projected to continue to decline in the future. More important to Eisner than the level of the deficit is the composition of government spending. He worries about the declining proportion of federal expenditures that can be considered investments in our future. When Bill Clinton entered office he embraced Eisner's perspective. The President told a generally supportive American public that we needed to gradually reduce our budget deficit but that a much more important problem was our need to overcome our investment deficit. Clinton proposed significant increases in spending on education, on reducing infant mortality, on research and development and on infrastructure. In other words, he wanted to use the federal government to improve the productivity of our plant and equipment and to nurture the intelligence and productivity of the work force. The Bill Clinton of 1995 is not the Bill Clinton of 1993. Now he tells us the spending deficit is much more important than the investment deficit. Back in 1971 Richard Nixon declared, "We are all Keynesians." It marked the highwater mark of the belief that government spending served a useful purpose in reducing unemployment and shoring up those parts of the economy the private sector ignores. In 1995 Bill Clinton, in effect, declared, "We are all neo-classicists." He now apparently believes that far more important than the investment deficit is the debt. He tells us that the most important objective of all is to balance the federal budget. His conversion means there is one less national voice willing to educate the American public about how the national economy actually works. He becomes one more powerful voice to embrace the superstition of the day.