All this is now so routine that it hardly attracts notice. In his 1995 budget (to be released Feb. 7), President Clinton will surely claim that he is being tough on deficits-without, almost certainly, projecting a balanced budget in this century. This inertia explains the pressure for a constitutional amendment requiring a balanced budget. In my view, an amendment would be unwise. In some circumstances, it could easily be evaded. In others, it might prove too rigid. Either outcome would undermine constitutional authority. But the goal of a balanced budget is right even if the instrument for reaching it is wrong.
The point is not that federal budgets have no economic consequences. But their short-term effects-for good or ill-are consistently exaggerated. In the 1960s, it was said that deficits would raise economic growth; after three decades of deficits, we know that this is not true. More recently it has been said that lower deficits would raise economic growth by reducing interest rates. At best, this is a huge exaggeration. Today’s lower interest rates mostly reflect lower inflation.
What mainly drives the U.S. economy are the decisions of consumers and companies. This is not to say that the budget plays no role, but the main uses of government involve social goals whether more defense or less poverty. The obsession with economics distracts us from basic political issues. What can and should government do? Who deserves help’? Which governmental functions are national and which are better left with states and localities? All these questions have suffered from neglect.
It was not always so. Political scientist James Savage has shown that the early belief in balanced budgets (promoted most by Jefferson) reflected a popular desire “to limit the purpose and size of… government.” This did not prevent government’s growth. In the late 19th century, Republican presidents raised public-works spending. But growth had to be financed from an expanding economy (which generated new revenues) or explicit tax increases. This ethic survived the Depression and World War II. Between 1946 and 1952, President Truman balanced four budgets. President Eisenhower actively defended balanced budgets. “In good times, we must at the very least pay our way,” he said in 1960.
We didn’t. The deficits didn’t become serious only with President Reagan. The best indicator of this is the “structural deficit” as a share of our national output (gross domestic product). What it shows is the basic gap between our demand for government and our tolerance for taxes. It removes the effects of inflation, economic growth and recessions - all raise the deficits in dollar terms–from the deficit measures. In Eisenhower’s second term, the structural deficit was essentially zero. Since then, it has climbed steadily, as the table shows.
The increase of the deficits in the 1980s occurred mainly because President Reagan halted a drop of defense spending that had, in the 1970s, financed a huge increase in domestic spending. (Between 1969 and 1980, defense spending declined from 45 to 23 percent of federal outlays.) The post-cold-war drop in defense spending is now pushing the structural deficit toward 2 percent of GDP, estimates the Congressional Budget Office. This is better, but not good enough. We should be aiming for a zero structural deficit by the end of the decade.
Adopting Eisenhower’s rule-paying our way in good times -would compel Congress and the president to be more discriminating in the use of government. There would be more pressures to weed out the least useful programs and to curb entitlement programs (from social security to college loans) for well-to-do recipients who aren’t terribly needy. Any major expansion of government spending would demand a consensus in favor of higher taxes. Obviously, even this discipline can be evaded. Clinton’s health plan would put massive new spending off budget via federal mandates. But Eisenhower’s budget standard would still be a huge advance.
In my view, it would also be good economics. Bigger government is more likely to burden the private economy. Whatever deficits’ economic dangers, they are mostly long term. These include the possibility that government might inflate its way out of debt or that high federal borrowing might depress private investment. The antidote for both is an end to permanent deficits. This need not require self-defeating behavior: trying to cut spending or raise taxes in recessions. Even in the 19th century, government often tolerated deficits (or reduced surpluses) during slumps.
What permanent deficits do is to pay for present spending with future tax increases or spending cuts. We are handcuffing tomorrow’s governments with today’s debt. The alternative to a constitutional amendment is for the president to lead public opinion toward a new discipline. If Clinton doesn’t propose to balance the budget, the obvious question is: why? And the next question is: who, then, will balance the budget? The answer is Chelsea, her friends and our children. It’s the wrong answer.
1960s 1.0 percent 1970s 1.8 percent 1980s 2.9 percent
