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NATIONAL
JOBS FOR ALL COALITION 11563
UNCOMMON SENSE 9
February 1996
WHY
THE DEBT ISN'T ALL BAD:
BALANCING
OUR DEFICIT THINKING*
by
Robert Eisner, William R. Kenan Emeritus Professor of Economics,
Northwestern University, past president of the American Economic
Association
*Reprinted
with permission from The Nation magazine, (c)1995, The
Nation Company, Inc. Professor
Eisner was a member of the Advisory Board of the National Jobs
for All Coalition.
Almost everybody
is against budget deficits. Almost nobody knows what they are,
how they are measured or how they can really be expected to affect
the economy or our well-being.
Many say, I balance
my checkbook, why canôt the federal government balance its
own? But few know the unique way the federal government does its
accounting: It fails to distinguish investment or the acquisition
of capital assets from current expenditures. By federal accounting
methods, most major businesses, households and state and local
governments would be in "deficit." To "balance our checkbooks"
we would have to give up much business investment and all borrowing
to buy a house or car or send our children to college.
Many, including The
New York Times and other major newspapers and even President
Clinton, have at times confused the deficit and the debt. The
conventionally measured deficit is in fact the amount that government
outlays exceed revenues during the year, hence the amount that
has to be borrowed. The debt is the accumulation of all that has
been borrowed, net of what has been paid off. The 1995 fiscal
year deficit of $164 billion, far down from the $290 billion of
1992, thus added (approximately, because of some of the vagaries
of federal accounting) $164 billion to the debt of the government
to the public, raising it to some $3600 billion, or $3.6 trillion.
But so what? We are
told over and over again that this is terrible because we are
leaving this huge debt to our children and grandchildren. That
debt of $3.6 trillion is composed of savings bonds, Treasury bills,
notes and bonds held overwhelmingly by the American public. If
they are not "paid off," and they almost certainly will not be,
they will be the assets of our children and grandchildren. And
as Abraham Lincoln said in 1864, with apparently undue optimism
with regard to public understanding, "The great advantage of citizens
being creditors as well as debtors, with relation to the public
debt, is obvious. Men can readily perceive that they cannot be
much oppressed by a debt which they owe to themselves." As Lincoln
referred to the debt, "Held as it is, for the most part, by our
own people, it has become a substantial branch of national, though
private property." If we were somehow to eliminate it today we
would be taking away from the American people some $3 trillion
of their savings, whether held by them as individuals or indirectly
by their pension funds, insurance companies, banks and businesses.
The effect of deficits,
in fact, is to make the public spend more, partly because they
can and do spend a major portion of that difference between what
the government gives them by its spending and what it takes from
them in its taxes. And that accumulated debt also induces more
spending by making people feel richer.
Is this bad? Generally
not. The more people spend, the more business sells and hence
the more it produces. And to produce more, business generally
has to hire more workers, thus reducing unemployment.
Can deficits be too
large? Yes, but essentially only when we are really at full employment.
Increased deficits then cannot increase employment because no
additional workers are available. Hence they also cannot bring
about an increase in production; the increased spending from the
deficits can only raise prices--inflation. But the fact is that
despite an official measure of unemployment now down to 5.5 percent,
as against the 7.4 percent of 1992, we still are a long way from
the 3.5 percent range of the Vietnam War or the 1.2 percent of
World War II or the 4 percent that is still the official full-employment
target proclaimed in the Humphrey-Hawkins Act of 1978.
The curious thing
is that, despite all the political furor, if the deficit and debt
ever were a problem, they are much less of one now. This is partly
due to the deficit-reducing measures already undertaken by the
Clinton Administration but, in a major way, simply to the shape
of the American economy. For when our gross domestic product--or
national income--and business profits are up, tax revenues are
higher. And when, along with that, unemployment is down, outlays
for unemployment benefits and "welfare payments" such as food
stamps are down. Indeed, it has been estimated by the Congressional
Budget Office that each percentage point reduction of unemployment
reduces the deficit by some $50 billion.
But deficit and debt,
like everything else, have to be looked at in relation to the
size of the economy. If a household owes $60,000 on its mortgage
when its income is $60,000, its debt burden is surely less than
if it owes $50,000 with an income of $30,000. And so it is for
the nation. Our deficit in 1995 is 2.3 percent of G.D.P., compared
with 4.9 percent in 1992. And more relevant, our debt is rising--as
it must as long as we have any deficit--but the ratio of our debt
of $3.6 trillion to our G.D.P. of about $7 trillion, just over
50 percent, is coming down. The deficit is so small that the debt
is growing less rapidly than our G.D.P. In that relevant sense,
we are already in balance or actually in surplus.
The debt-G.D.P. ratio
was well over 100 percent at the end of World War II, ushering
in an era of prosperity and growth. We should perhaps be worried
that the current ratio of only 51 percent is now coming down.
By reducing our spending that decline may slow the economy or
even usher in a recession. And this would deal a body blow to
private investment and the provision for our future--and that
of our children and grandchildren.
Some contend that
reducing deficits, let alone achieving a balanced budget, will
lower interest rates as the government borrows less, and thus
raise productive investment. Numerous economists have examined
the data in rigorous fashion and find no clear relation between
deficits and interest rates. What is clear is that interest rates
would come down if the Federal Reserve abandoned its misguided
opposition to an economy prosperous enough to lower unemployment
(and in its view cause rising inflation) and stopped trying to
keep them up. Reductions in deficits that forced a reduction in
private consumption would be most likely to discourage private
investment. Chrysler and Ford would invest less in new facilities,
not more, if we stopped buying their cars.
Others maintain that
our debt means taking from the poor to pay interest to the rich.
But that argument is also dubious. The rich, for tax reasons,
do not hold most of our government bonds, and the poor do not
have enough income to pay most of our taxes.
Most conservative
economists do not really care about the deficit. They advocate
balanced budgets because their real desire is to cut government
spending, particularly on the "social programs" they abhor. And
that shows up the worst effects of deficit paranoia. It is used
to justify depriving the American people of their health care,
their education and all of the public investment on which their
future depends.
The casualties, along
with full employment, are Medicare and Medicaid; loans to college
students; child care; job training and an expanded earned-income
tax credit to properly end welfare as we know it and get people
from public dependency to work; our public infrastructure of roads,
bridges and airports; and the land, water and air by which we
live and breathe.
s.
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