Getting It Backwards: Why Balancing the Budget Isn't Enough

By Buell, John | Commonweal, October 25, 1996 | Go to article overview

Getting It Backwards: Why Balancing the Budget Isn't Enough


Buell, John, Commonweal


In the midst of a fiercely contested presidential election, too little attention has been devoted to a pivotal conviction shared by both major-party candidates. Both assume that if the federal government can only balance its books, our economic salvation will be assured. The candidates differ only in their appraisals of their opponent's willingness to take the hard steps needed to attain this widely valued goal.

The near universal belief that we are going broke helps explain much of the public confusion over such valued domestic programs as Medicare. Most citizens know that some federal programs have been sound and effective. Even this Democratic president, however, has become a born-again budget balancer, thereby undercutting much of the public will to preserve even those social initiatives citizens have long respected. Nonetheless, before everyone becomes inured to the homely verities about the cruelties debt imposes on our grandchildren, I would like to offer four bits of folk wisdom:

* Look before you leap. Some perspective on the size and origin of the problem might be useful. The significance of any debt lies in its relationship to capacity to pay. The current national debt is still a far smaller fraction of our total economy than it was in the late forties. We emerged from this earlier "binge of debt" as the world's strongest economic power. University of California-Riverside economist Robert Pollin has shown that economic growth in the big-spending 1945-80 era was far faster than during the years of limited government and small debts, 1875-1929.

During the post-World War II period, government taxes and job creation modulated the typical capitalist business cycles. However, in the Arcadian past celebrated by House Speaker Newt Gingrich, business profits were not automatically reinvested in new facilities, and worker income and consumer power did not always keep pace with growing productivity. Even before the tragic climax of that era, the Great Depression, bouts of unemployment were frequent and crushing.

* Actions speak louder than words. Business leaders preach the virtues of fiscal austerity, but most businesses borrow money in order to expand. (So also do most political magazines, both left and right.) Indeed, as the size and productivity of the business grow, so does its debt.

Businesses also distinguish between operating and capital budgets. It is unreasonable to expect a business immediately to pay off the cost of a new lathe intended to last at least a decade. Jeff Faux of the Economic Policy Institute reports that if the U.S. Treasury distinguished between operating and capital expenditures, our current deficit would shrink by about $140 billion.

* Think long-term. Most families have debt. The smart ones borrow to send kids to college or to buy a home. Foolish families borrow for Florida vacations. Recently, both business and government have been taking lessons from the foolish families. Nearly 80 percent of the funds borrowed by U.S. corporations in the 1980s went for leveraged buyouts, mergers, and acquisitions. These costly moves improved short-term profitability and market power but did relatively little to create jobs or increase productivity. Government itself spends more on the military in real terms than in 1980 and far less on basic energy research. Following the worst business practices, government seeks short-term leverage rather than the more enduring sources of security in a technologically evolving world. In many of our competitor nations, unions and the public are much more diligent in insisting that private profits, and public revenues go to productive social uses. …

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