Deficits, Saving, and Economic Policy

By Eisner, Robert | American Economist, Fall 1994 | Go to article overview

Deficits, Saving, and Economic Policy


Eisner, Robert, American Economist


Many talk about "the deficit." Few, literally, know what they are talking about. Many talk about saving, and proclaim that Americans save too little. Few know what saving is or how it is generated. Many insist that our large deficits are responsible for low rates of national saving. Few have even sought to confirm this in rigorous fashion. Some supportive arguments have entailed either elementary failure to note the frequently common factor in both: a sluggish economy. Others have been based on simplistic manipulation of national income accounting identities on the implicit assumption that one element, the Federal government budget deficit, can be changed without changing others, in particular, income itself. I shall focus here on the effects of changes in real, structural government deficits on economic growth and national saving and their implications for government policy.

Many who harp on the perils of "the deficit" haven't the foggiest notion how the deficit is measured. Many, including the major news anchor people, editorialists in leading newspapers such as The New York Times, and countless politicians, confuse deficit and debt. The debt, of course, is the amount owed at any point in time, what has been borrowed and not paid back, or the sum of all previous net borrowings. The deficit is the amount by which expenditures exceed tax revenues in a given period and hence the amount that must be borrowed or added to the debt over that period.

Indeed most do not even understand the measures of the U.S. Federal debt about which they speak so much. The most frequently cited figure, over $4,351 billion at the end of the 1993 fiscal year, is a gross "total" figure, which includes over $1 trillion of "debt" held within the government, largely by trust funds such as those for social security for old age and retirement. But a more meaningful figure, measuring the impact on household spending, financial markets and business decisions, is what is called the "Gross Federal debt held by the public." This came, at the end of the 1993 fiscal year, to $3,247 billion dollars. Even that figure might be reduced by more than $300 billion for the Treasury securities held by the Federal Reserve banks; since these are technically public corporations, their holdings are included in the debt held by the public.

As for measures of the Federal deficit, we have a vast number, but most of the official ones should horrify any private or public accountant concerned with applying sensible accounting principles. Aside from a bewildering proclivity by the Congress to place vast expenditures and receipts "off-budget," U.S. Federal accounting violates a basic principle of accounting for private business, state and local governments in the United States, and government sector transactions over the entire world: it does not distinguish between current or operating outlays and capital expenditures.

That makes as much sense as it would for a family not to distinguish between borrowing to finance the purchase of a new home or invest in the children's education and borrowing that finances gambling losses at Las Vegas. If there were no separate capital accounts almost every large corporation would be reporting "deficits" or losses. Of course, in fact, private business excludes capital outlays from its current account and charges only depreciation in presenting its income or profit and loss statements. And state and local governments in the United States are usually required, in their constitutions, to balance current or operating budgets; capital outlays, as for roads and bridges and new water systems or school buildings, are financed by separate borrowings.

If tangible capital investment were excluded but the depreciation on past tangible investment included, the resulting U.S. Federal current budget deficit would be at this time little, or not at all, less than the overall deficits generally reported. This is a manifestation of something of which we should be much more aware--virtually zero net public investment in physical infrastructure. …

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