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Small Gains From Balanced Budget

By Mark Weisbrot / January 27, 1997



"America demands and deserves big things from us," President Clinton proclaimed at his second inauguration. "And nothing big ever came from being small."

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But smallness is the order of the day, if we accept the president's claim that a balanced budget will be a top priority of his second term. Few people realize how small the potential gains from balancing the federal budget actually are. One way to see this is to accept all the assumptions of the budget-balancers, and see what we could get out of reducing the federal deficit to zero.

The deficit hawks claim that federal borrowing soaks up some funds that would otherwise be used for private investment. If we eliminated it, they say, long-term interest rates would drop, investment would increase, and the economy would grow faster.

Now for the embarrassingly naive question that nobody wants to ask: how much faster? The more favorable estimates - as projected by the Congressional Budget Office - would give us about 7/100ths of 1 percent of gross domestic product per year. If these gains were distributed in proportion to people's income, the typical household would increase its weekly income by about 53 cents. To abuse an old saying, that and a quarter could get you a cup of coffee - at least at some gas stations along the interstate. Of course these gains would compound over the years. In just a few years the bounty would grow to a cappuccino at Starbuck's.

This is a generous estimate, based on bringing the deficit from 2.5 percent of GDP to zero. The deficit today is only about 1.3 percent of GDP, or $110 billion. That's not enough money, relative to the size of our economy, to have much of an effect on interest rates, then investment, and finally growth. Again, this is granting all the budget-balancers' assumptions about the sequence of economic events described above. There are still quite a few economists who believe what they teach in the intro courses: that balancing the budget would actually slow the economy rather than increase growth.

Not to be outdone in thinking small, 55 Senate Republicans (and seven Democrats) want a constitutional amendment requiring a balanced budget. Now, there are jokes about how economists rarely agree, and even when they do they aren't necessarily right. But the balanced budget amendment would have the government raise taxes and cut spending during a recession. Don't expect to see too many prominent economists willing to stand up and defend that logic.

The amendment is demagoguery in the purest sense of the word, taking advantage of the lack of honest public debate to score a few cheap political points. This gives the Clinton administration the chance to pose as moderate, since it "only" wants to balance the budget by 2002. But this is only slightly less dumb as an economic policy (not to mention priority), and quite predictably leads the Republicans to up the ante in this ridiculous game of liar's poker.

So much for the America that demands and deserves big things. That already tired bridge to the 21st century is going to be very small indeed, and made out of rope. Forget about the 41 million people without health insurance, or the 15 million children growing up in poverty. This government has other priorities.

No extra cup of coffee.

* Mark Weisbrot is research director at the Preamble Center for Public Policy and a research associate of the Economic Policy Institute in Washington.