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World: Only Some Cheer For Balanced Budgets

  • Robert Lyle



Washington, 5 November 1998 (RFE/RL) -- When the 1998 financial year came to a close September 30, U.S. President Bill Clinton led the celebrations for the first balanced government budget in 29 years.

"The deficit reduction has saved the American people more than a trillion dollars on the national debt," he said at a White House ceremony. It has helped lead to "lower interest rates, higher investments, (and) unprecedented prosperity."

Balancing the budget and producing a surplus, said Clinton, is the core of a new vision of government that lives within its means.

Producing a balanced budget has become a political article of faith in virtually every country of the world in recent years.

The Lithuanian government was especially proud last month when it introduced a budget that for the first time in five years contained no deficit. That's why President Valdas Adamkus was reportedly stunned this week when, according to presidential adviser Elena Leontjeva, a visiting International Monetary Fund (IMF) team suggested that because of some outdated methodology, the draft budget actually failed to reflect the full state debt.

Bulgaria, in it's memorandum on economic policies filed with the IMF to support it's new three-year extended loan, said the government intends to "maintain an underlying broadly balanced budget."

Back in the U.S., Congressman David Hobson (R-Ohio), the second ranking member of the house budget committee, says balancing the budget takes the government out of the borrowing business and frees up more money for investment in economic growth.

He argues that cutting the government's need to borrow money would lower interest rates, create over four million new jobs in the U.S. in the next decade, and increase per capita incomes by 16.1 percent.

Who can argue with living within your means? After all, doesn't every family have to live on the money it earns?

Charles Dickens made the point in his novel "David Copperfield," when one character said he who lives on a little less than his income has "happiness" while he who spends more than he earns is in "misery."

A private study group in Canada, in a research paper entitled "Debtors' Prison," said that "servicing the debt is government's least productive expense -- it is an economic drag on society, it threatens our ability to fund social programs and it endangers the economic well-being of future generations of Canadians."

Even in ancient times it was a noble goal. Cicero in 63 B.C. said "the budget should be balanced, the treasury should be refilled, public debt should be reduced (and) the arrogance of officialdom should be tempered and controlled lest we become bankrupt."

Yet this seemingly unassailable "good" idea is not universally accepted as being so good.

The American Enterprise Institute's James Glassman, writing in the Washington Post last year, said the idea of a balanced budget is "actually dangerous and distracting."

The argument about the evil of the federal debt, said Glassman, is "based on a fallacy, which is that it's a burden on future generations."

Even if the U.S. government simply balanced future budgets and left the current debt of $5.4 trillion perpetually on the treasury's books, he said, it would be balanced by $5.4 trillion in assets. "Roughly four-fifths of those assets -- beautiful T-bonds are held by Americans," said Glassman. "Our children won't inherit debt, they'll inherit bonds."

Thus even the money government's spend on interest on the national debt is "one of the few benign federal spending programs" because "private bondholders who earn interest are likely to invest that money more productively than Washington does," said Glassman.

Recent market turmoil sent millions of investors shifting their money from stocks into what they call "safe havens" -- U.S. treasury instruments. Without federal debt there would be no "safe haven" treasury bonds for skittish investors to buy. What that means, says Glassman, is that citizens are both borrowers and lenders.

In 1864, U.S. President Abraham Lincoln showed he understood that there are two sides of a accounting ledger when he told the Congress: "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."

The Twentieth Century Fund and Foundation, a major American policy study organization, says it is a "myth" to think that the federal government is like a family. "Since families are expected to live within their means, isn't it logical that the government should balance its budget too," it asks. The answer, says the fund, is that all indebtedness is not created equal.

Running up debt on charge cards to pay for everyday expenditures like restaurant meals and fancy clothes is imprudent, sometimes even catastrophic, it says. The same is true for governments.

But taking out a mortgage to buy a home or a student loan to pay for a college education, as long as you can afford the monthly payments, is "not a reckless violation of family values."

In fact, it is a long-term investment for a family. Few families would be able to even consider owning a home or getting an advanced education, or even starting a business of their own, if they had to finance these out of regular income.

Many government expenditures -- especially capital costs for infrastructure like highways, airports, water and sewer systems -- are investments which have a return over many years.

Also, argues the fund, unlike governments, humans eventually die, so sooner or later their debts come due. Government can roll over and refund its debts in perpetuity for all practical purposes, so long as the growth in the debt does not suddenly soar relative to the growth in the economy.

Some have argued in the U.S. context that the federal government should do what the state governments already have to do -- live within their budgets.

But the National Conference of State Legislatures says there is no comparison between national and regional governments. For one thing, the states do borrow extensively and those debts are not counted in "balanced" state budgets. The regional governments also in the end can and do depend on the national government if things really go sour.

Two prominent American economists have argued that the U.S. federal deficit isn't nearly so bad as it seems because it measures many of the wrong things. Robert Eisner, past president of the American Economics Association and Alan Blinder, former Vice-chairman of the Federal Reserve (central bank) say in a recent book that the U.S. debt doesn't consider state and local government surpluses and makes no distinction between types of debt.

"Families distinguish between investing in a college education and paying for a summer vacation," they said. But when calculating the federal deficit, a dollar spent on farm subsidies -- here today, gone tomorrow -- is counted the same way as a dollar invested in a highway that will last for decades and contribute to economic productivity, they said.

Perhaps surprisingly to some, the International Monetary Fund (IMF) does not take a hard and fast position on balanced budgets. Official documents of the fund show that the IMF considers different types of balanced budgets -- operational, structural or primary -- when it advises member governments.

It says that "while it is recommended that analysis of the government's fiscal position should be based on the overall balance, this measure has acknowledged weaknesses."

What the IMF recommends is budget balances which are appropriate to a country's situation, weighing all of its economic and financial measures. In other words, say officials, "realistic, long-term" targets that promote growth, keep inflation under control and keep debt from getting out of hand.

But officials acknowledge as well that there is no stronger political imperative anywhere than the "good" of balancing the budget and getting out of debt.

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