It looks as if a balanced budget looms. Treasury Secretary Rubin noted on a talk show this past weekend that from November to November, Uncle Sam actually took in as much as he laid out.
But looks can be deceiving.
First, the bad news. The day Washington starts slapping itself on the back for balancing the budget — slapping that’s already begun — we’ll still be running a deficit well in excess of $100 billion. That’s because of how we account for the Social Security Trust Fund and scores of other, much smaller, trust funds. The surplus Social Security taxes we’re supposed to be piling up for our old age are actually counted as “revenue” by Uncle Sam. We’re spending, not saving, it. In 1998, the Social Security surplus is expected to be around $100 billion. So whenever you hear a federal budget number, just subtract $100 billion. If you hear that the budget’s balanced, then you’ll know we’re running a $100 billion deficit. If you hear we’re running a $35 billion deficit, then in truth we’re running a $135 billion deficit. A $50 billion surplus? No, a $50 billion deficit.
Imagine your own household budget. You spend $1,000 a week. You take in $940 — plus $60 that your daughter gives you every week for safekeeping. She’s saving up for college. Would you say your budget is balanced? You take in $1,000 a week, spend $1,000 a week. Yet, clearly, you are running a $60-a-week deficit, embezzling $60 a week from your daughter. About $3,000 a year. The day will come when your daughter presents you with the bill for Dartmouth and expects you to pay it with all that money she earned mowing lawns, sitting babies, designing web sites.
In Uncle Sam’s case, it’s not $3,000 but upwards of $100 billion (though still just 6% or so of annual revenues).
The further bit of bad news is that if we do achieve a balanced budget — which is to say a $100 billion deficit — we will have done it in a prosperous economy. Imagine how the deficit might swell in a recession.
So before you rush out to spend the hoped-for surplus now much in the news, please bear in mind — and tell all your friends — it’s not a surplus at all.
Or is it?
Here’s the good news. Because of the way Uncle Sam accounts for what any ordinary business would term “capital spending,” things may not be nearly as bad as they seem.
When a business buys a machine or a county builds a road, it amortizes the cost over the life of that machine or road. (I’m oversimplifying, but this is the general idea.) When Uncle Sam buys a machine or pays much of the cost to build a road, it “expenses” the full amount then and there, just as if it were paying the phone bill.
So just as we’re shortchanging our children by the way we account for the Social Security surplus — spending the money we should be saving — so are we shortchanging ourselves in their favor by treating as a current expense the cost of projects that will benefit them many years into the future.
You will be forgiven for wondering why we don’t just do the accounting properly. Why not exclude the Social Security surplus from the budget numbers? And why not charge to future years a sensible portion of the capital investments we’re making, as any business would? Hello? Is anybody home?
The first part — excluding the trust fund surpluses from budget revenue — would be easy. But the second is tougher than you might imagine. Clearly, building a road or a bridge is an investment. How about a tank or a fighter plane? Funds for education? Midnight basketball? All these are investments in our future. (The goal isn’t the basketball game per se, but helping to steer kids down the path to productive citizenship, working and paying taxes, rather than the path that leads to crime and incarceration, absorbing taxes.) Yet where would it end? One can imagine Congress sorely tempted by the lure of this kind of accounting. Could all education expenditures be written off over 50 years rather than “expensed” all at once? You can just see the free-for-all.
So in an odd sort of way, our irresponsible Social Security accounting may be more or less balanced by our conservatism in expensing our capital expenditures.
In a sense, one might argue, our accumulated national debt — the sum of all those annual budget deficits we’ve been running, now up to about $5.5 trillion — is like the long-term debt of a company that’s been making investments in the future. At a bit under 70% of our Gross Domestic Product, it’s higher than we’d like, but by no means insupportable. It’s been higher, it’s been lower.
Especially in prosperous times, we should lean against the wind to lower that 70% ratio. Gradually reducing it to the 30% or so it was before the Vietnam war would improve our fiscal health. But here’s the thing many people miss: It is the relative size of the debt, not the actual dollar amount, that matters. A $100 million debt would swamp most small businesses but mean nothing to an enterprise like Intel. Our $5.5 trillion debt would swamp Germany or France but is not the end of the world for us. It’s that 70% ratio, not the $5.5 trillion, we need to focus on and reduce.
If — with honest accounting for the trust fund surpluses — we ran a $110 billion deficit this year, we would expand the national debt by 2%. But if at the same time the economy grew by 5% — say, 2% inflation and 3% real growth — then the national debt would actually have shrunk relative to the economy as a whole. Keep this up for 50 years — 2% growth in the debt, 5% growth in the economy — and you have a $90 trillion economy and a $15 billion debt. At which point the debt, far from approaching 70% of the gross domestic product, would be not quite 17%.
This is not to deny the symbolic importance of a “balanced budget,” however oddly it is calculated. But it does give one a somewhat more sanguine feeling about our fiscal affairs.
Less important than a zero deficit, let alone paying down the debt, is making the money that we do lay out count. Six hundred dollar hammers are obviously out; welfare payments to those who don’t need them only breed dependency and cost self-esteem; unneeded pork barrel projects deserve the line-item veto.
In years of high tax revenues and low unemployment, we should be paying down the debt. But in most years, it’s enough to have it grow slower than the economy as a whole.
This is not the stuff of stirring slogans, bold goals, or calls to action. For that you need something simple: Balance the budget. Pay off the debt. But even if “perception is reality” — an important point for investors to bear in mind — the reality is, nonetheless, somewhat more complex. We haven’t balanced the budget, and we certainly shouldn’t spend the “surplus.” But neither need we pay back that $5.5 trillion.
Quote of the Day
If I had my way, I would write the word 'insurance' over the door of every cottage and upon the blotting book of every public man, because I am convinced that for sacrifices that are inconceivably small, families can be secured against catastrophes that would smash them forever.~Winston Churchill
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