Deficit Too Small, Says One Economist
ECONOMIST Robert Eisner says the United States federal budget deficit should be larger - not smaller.
Do we hear a few boos and hisses?
The deficit for fiscal year 1992, ending Sept. 30, was projected by the Bush administration at $399.7 billion. Because the Resolution Trust Corporation isn't spending money as fast as anticipated to clean up the savings and loan mess, some experts are now saying the deficit may "only" be $330 billion.
Whatever the correct total, for most Americans the deficit is far too large. Indeed, Congress is expected to pass a constitutional amendment in June mandating a balanced federal budget.
Dr. Eisner was invited to Washington yesterday to tell a Congressional Research Service seminar that this amendment is "bad economics." Deleterious effects, he says, "will be only partially mitigated by substantive unenforcibility."
The Northwestern University professor says the deficit is exaggerated by mismeasurement. Last fiscal year the deficit, as measured by the Office of Management and Budget (OMB), was $269 billion. A better number, Eisner says, would be $17 billion.
To get there, he first subtracts the $67 billion cost of the savings and loan crisis, leaving $202 billion. Here, he explains, the government is buying the assets of the bust thrifts. These assets will eventually be sold, many at a loss. The return on these sales, by OMB accounting, would then reduce future deficits. This "financial transaction" has no impact on the economy, Eisner maintains. It is only a shift in the portfolio of the government.
Then Eisner roughly estimates that the federal government in fiscal 1991 made $70 billion in "capital" investments, including highways, bridges, airports, research, and the federal contribution to education. State governments, he notes, do not include capital expenditures when balancing their budgets. Subtracting that knocks the deficit down to $132 billion.
The next step is to subtract the state and local government surplus of $30 billion. That's fair, he figures, because the surplus wouldn't exist without some $170 billion in federal grants in aid to these governments. That move reduces the deficit to $102 billion.
Finally, Eisner subtracts what he calls an "inflation tax" of $85 billion. This amount is reached by taking 3.3 percent (a broad inflation rate) of the $2.5 trillion average outstanding federal debt held by the public (not by the social security fund, the Federal Reserve System, or other government agencies). Inflation reduces the value of these debt obligations, helping Uncle Sam, hurting the bondholders.
This leaves a total "adjusted" government deficit of $17 billion - peanuts in a $6.1 trillion economy.
Eisner doesn't buy the conventional view that the deficit automatically reduces the amount of national savings available for productive investment. His research finds that savings grew whenever the government had large deficits in the past 25 years. That's because, he says, the US economy has usually been running with slack capacity. So extra government spending or tax reductions can stimulate growth and more saving.
Because of the current modest pace of the economy, the deficit has swelled with higher spending on unemployment insurance benefits and other such costs and with shrunken revenues. That portion of the deficit will go away with further economic expansion. Eisner maintains a bigger deficit now could speed that process. He would like the extra spending to go for constructive purposes, such as infrastructure improvements and education.
Eisner holds that the nation could have deficits as far as the eye can see - without harm - as long as they aren't so large as to boost the ratio of outstanding debt held by the public to gross domestic product (or national income). If GDP in current prices grows 7 percent, then accumulated debt could grow 7 percent and maintain a constant debt-to-GDP ratio. That would have allowed a $188 billion deficit in fiscal 1991. This was almost exactly the $189 billion deficit recorded in the national income and product accounts by the Department of Commerce - a deficit measure regarded by Eisner as better than the OMB number.
But won't a bigger debt burden our children? No, says Eisner, since it is the children who will be servicing the debt through taxes and receiving the interest or, if any, principal payments.