Why Has the Balanced Budget Become the Holy Grail?
by David Morris
January 16, 1996
How did a perfectly balanced budget become the holy grail, to be secured at any cost? Why have we come to believe that the stock market rises and falls based on our progress towards reducing the federal budget deficit to zero? When did we decide that it was preferable to stop delivering basic services to ourselves, our neighbors and our children rather than allow the government to borrow any money?
It may be too late to inject a little rationality in the balanced budget debate. But what the heck. Somebody has to try.
The U.S. budget deficit is one of the lowest of any government on the planet. In Europe, the banking community decided that for countries to join a common currency union they had to have their financial house in order. For these bankers, that meant having a budget deficit of 3 percent or less. The U.S. deficit is under 2 percent. Indeed, except for interest payments, the federal budget last year had an actual surplus of $84 billion.
As economic historian Frederick Thayer has pointed out, every time we’ve made an aggressive and successful effort to reduce the deficit to zero we’ve experienced a financial disaster ( l817-21; l823-36; l852-57; l867-73; l880-l893; l920-30). On the other hand, in 112 years of deficit spending since 1791 we’ve never suffered a depression. Is that coincidence?
When the federal government runs a reasonable and manageable deficit the extra purchasing power ripples through the economy, increasing jobs and raising wages. Many economists swear that this additional spending also drives up inflation and interest rates. Yet that would occur only when we are at full employment, a blessed state the United States has not achieved for more than a generation. As Robert Eisner, former president of the American Economic Association says, “Numerous economists have examined the data in rigorous fashion and find no clear relation between deficits and interest rates.”
Deficits fluctuate, depending on the robustness of the economy. The budget deficit soared from 1 percent in 1980 to 4.5 percent in l983, the depth of a recession. Then it plunged back to 1.5 percent in 1989, when we suffered a second recession that pushed it up again to 4.5 percent in 1992. Today the deficit is back to where it was in 1989.
Deficit spending doesn’t prevent business downturns, but it does reduce the severity of recessions. And it directly helps the poor, as unemployment insurance and welfare payments increase.
The Republican Party insists that the government discard this classically effective tool for protecting the health of the economy. And Newt Gingrich promises to stop the government from operating effectively until the President agrees to abandon the federal commitment to help the needy in case of recessions.
Republicans demand that the federal government be run like a private corporation. But corporations distinguish between investments and consumption. The federal government does not. For Washington, buying pencils, building bridges and developing a better artificial heart are all treated the same on the books. Professor Eisner estimates that in 1991, when the putative deficit was $193 billion, the actual deficit, if calculated as corporations do, would have been $24 billion.
“The task of public policy should not be a balanced budget come hell or high water”, Yale economist William Nordhaus recently told the New York Times. It “is to weed out low yield public investments and to reduce inefficient public subsidies.” If that were how the budget debate were framed, what would we do?
We would target the two largest federal expenditures: military and health. Military spending, especially on weapons, channels the genius and work of hundreds of thousands of top engineers and scientists and skilled workers and hundreds of billions of dollars to make products no one ever uses. We spend more on the military than the entire world put together. The cold war is over. Conservative organizations like the Cato Institute and think tanks like the Center for Defense Information, led by retired admirals, have shown how we could virtually eliminate the federal deficit through reductions in military spending while still having the capacity to defend ourselves and successfully wage a major war anywhere on the planet.
The key strategy to reducing health care costs is to reduce overhead. Replace the 1200 odd health insurance companies with a single federal insurer. Medicare spends 2-4 percent of each premium dollar on its own bureaucracy. Corporate HMOs frequently grab more than 20 cents on the premium dollar for overhead and profit. The Republican health care plan increases overhead expenses. As three health care experts conclude in a marvelous report called, A Rational Option, “shifting seniors to corporate managed care plans will transfer $30-40 billion a year from health services to the pockets of executives and shareholders of some of the largest corporations in the country.”
To sum up. The federal budget deficit is low and getting lower. If the government used a more conventional bookkeeping system the deficit might all but disappear. Deficit spending reduces the severity of recessions. Prudent cuts in the military and the creation of a single insurer health system would end the deficit. Any more questions?