Accounting the Future

Bill
Clinton plans to spend $219 billion on educating and training
Americans and
on rebuilding the infrastructure of the nation. George Bush plans
to cut taxes.
In assessing the two plans, much of the media-along with Paul
Tsongas, Warren
Rudman, Pete Peterson, ross Perot, and a group of vocal academic
economists-have
focused on one deceptively simple question: Which plan will
cut the budget
deficit the most?
On this criterion, Clinton's proposal is
obviously
superior because he has specified where the revenues would come
from to pay for
his plan; as of this writing, Bush has not-a difference that
elicited belated,
if not whole-hearted, support for Clinton's plan from Paul
Tsongas, among other
deficit fretters. But it's safe to assume that Bush soon will be
compelled to
offer his own laundry list of proposed spending cuts and "revenue
enhancers" (no
taxes, please), regardless of how gimmicky. The moment Bush's
list is released,
the debate about the two plans will shift to comparative
credibility: Which
candidate will really cut the deficit the most or at
worst, increase it
the least?

But deficit reduction is the wrong criterion to use in the first
place when
judging the two plans not that it's unimportant, only that it's
not the main
issue. Economic growth is the main issue, to which deficit
reduction is only
tangentially related. Over the longer term, a large deficit may
retard growth,
but it's not the biggest drag on growth. That distinction goes to
the nation's
failure to invest its failure to invest adequately in factories
and equipment
and its failure to invest adequately in education,
training, roads,
bridges, water and sewer systems, and the other foundation stones
of a modern
economy.

In accepting the Republican nomination for President, George Bush
ridiculed the
notion of public investment. "They call it `investment,'" he
said, "but it's
nothing but the old spending in a new package." While it's
certainly possible to
dress up old-fashioned government spending in `investment'
attire, Bush misses
the point. There's an important distinction between spending and
investing, and
the distinction is the same both in the private and in the public
sphere. Mere
spending does not increase future productivity; investing does.
When the
government funds criminal justice, national defense, unemployment
compensation,
welfare, mental health services, or farm price supports, for
example, it
maintains the safety and economic security of citizens here and
now. On the other
hand, when the government funds primary and secondary school
education, worker
training, and the building of roads and bridges, it enhances the
capacity of our
citizens to be productive in the future.

The
distinction bears directly on the deficit itself. Borrowing from
future
generations in order to invest in their capacities to be
productive is surely
more justifiable than borrowing from them in order to make
today's citizens safe
and happy. The former generates economic growth, which enables
future generations
to pay off the loan and enjoy its fruits. The latter simply
burdens them, without
growth. (In the late nineteenth century, the United States was
far more indebted,
as a portion of its national product, than it is today. But a far
larger share
of the borrowings was invested in canals, railroads, highways,
and telegraphs all
of which spurred growth, enabling Americans early in this the
century to pay off
the loans with ease.)

Obsessive concern about the deficit number misses this
distinction. But it
represents one of the most important differences between the
presidential
candidates this year. Even if Clinton and Bush were to reduce (or
increase) the
deficit equally, Clinton's borrowing would be matched by
investments in
education, training, and infrastructure. Bush's would not, and
never has been.
(The real scandal of the budget that Bush sent to Congress last
January wasn't
so much the expected deficit of $351.9 billion, but the paltry
sum of $133.1
billion which was to be invested, by the administration's own
estimate.) This
issue the government's real borrowings from the future relative
to its investings
in the future needs highlighting, not only during the present
campaign but also
in the future, regardless who wins the election.

How to highlight it? Public budgeting is an art form that now
bears almost no
relation to what the public understands its government to be
doing. There are few
more important subjects in public affairs than how the government
budgets itself,
and few so little understood by the public. By default, the
budget deficit number
has become a totem because the average citizen must balance a
checkbook and thus
easily comprehends what it means to be in debt. Inability to pay
a debt provokes
anxiety, for there are bad consequences; one can lose a car or a
home, or worse.
Moreover, the deficit number is stark, seemingly unambiguous, and
it can be
compared year by year an apparent benchmark of the nation's
economic and moral
health. This definitiveness, and the anxiety and unfolding drama
connected with
it, focuses public attention like nothing else about the budget.
How else to make
broad judgments about what the government is up to?



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In fact, the deficit and debt numbers bandied about today are
just about
meaningless. This year's deficit would be 30 to 50 percent higher
were it not for
accounting tricks adopted in recent years, such as moving
agencies or bailouts
off budget, accelerating revenue collections, altering the rules
for distributing
lump-sum retirement benefits to federal workers, and selling
government assets.
On the other hand, the deficit number would be much lower if the
budget included
surpluses in the Social Security Trust Fund, derived from all the
Social Security
taxes now being paid by the huge baby-boom generation. The
federal government's
overall debt is subject to similar ambiguities. If all unfunded
future
obligations (veteran's benefits, Social Security, government
retirees) were
included in the calculation, the debt would double from nearly $4
trillion to
around $8 trillion. On the other hand, if the value of the
federal government's
land holdings, buildings, and facilities were included, the debt
would shrink by
a third to a half.

The numbers aren't to blame, of course, but neither are those who
manipulate
them. The numbers are arbitrary and manipulation is easy because
there's no
consensus about what the budget is supposed to measure. The
public can't evaluate
how the government is doing because we haven't decided what the
government should
be doing.

In
an ideal world we'd scrap the numbers and start again. We'd ask
what any
family would ask about its own finances: What do we need to
know about
our
obligations and our investments in order to
make wise
decisions?
At the least, we'd decide that limits on what we
spent should be
connected to what the spending was for. In a family, the prospect
of sinking
thousands of dollars into a child's college education would be
judged differently
from spending the same amount on an around-the-world cruise for
mom and dad on
a luxury liner. A nation's budget should be no less logical.
Limits on outlays
should be related to their purposes. In particular, there should
be some logical
connection between the generation of Americans that pays and the
generation that
benefits.

At any given time, the "national family" comprises what might be
thought of as
three generations retirees, workers, and children (defined to
include all
Americans of the future). The three generations have certain
obligations to one
another. The national budget should remind us what those
obligations are, and how
well they are being fulfilled. Accordingly, the budget should be
segmented into
three parts, each with its own spending limit.

  • Spending on retirees should be limited to workers' (and
    employers')
    contributions. We can debate how progressive this system should
    be, and whether
    (and to what extent) it should be financed on a pay-as-you-go
    basis, with current
    workers picking up the tab for retirees. But the system should
    finance itself
    (any unfunded liabilities responsibilities to future workers
    which cannot be met
    at current levels of contributions should be fully disclosed),
    and be separated
    form the rest of the federal budget. No dipping into other
    categories; likewise,
    neither of the other two categories should be able to raid it
    for funds.

  • Spending on the living standards and safety of Americans
    here and
    now on defense, welfare, criminal justice, farm price supports,
    and so
    forth should be limited to tax receipts from Americans here and
    now. This part
    of the budget must be really balanced no "accelerated"
    collections of revenue,
    no borrowing from future generations, no tapping into retirement
    savings, no
    off-budget bailouts or other hidden spending.
  • The government may borrow only to finance investments
    in
    the future capacities of Americans to produce wealth (education,
    training, child
    health and nutrition, roads, bridges, and so on). And the
    borrowing and investing
    may rise only to the level at which the expected return on any
    additional
    investment isn't any higher than the return available to private
    investors on
    their own borrowings. The government may not borrow any more
    money than it
    invests.

These
are the principles. To make them workable, we'd have to add
three
additional wrinkles: First, the government should remain equipped
to stimulate
the economy. Counter-cyclical fiscal stumulus remains sound
economics, as long
as fiscal balance is pursued over the long term. Thus, when the
economy is
sagging, the rule should be that what's borrowed can exceed
what's invested so
long as borrowing and investing still roughly match over the
course of the
business cycle.

Second, new debt should be paid down as the nation reaps the
benefits of its
public investments. Otherwise, the long-term debt would continue
to balloon. This
would not be a problem if the debt continued to decline as a
percentage of a
growing Gross Domestic Product. But we should pay it off when we
can. One
reasonable possibility: an income-tax surcharge, triggered in any
year when the
economy grew faster than, say, 4 percent the proceeds of which
would be earmarked
for debt reduction. Finally, the yearly depreciation on public
investments should
be counted as a current expenditure.

Had the federal budget been organized this way years ago, net
borrowing would
probably be much lower than it is today, and more importantly net
investing would
be much higher. The public would have been alerted to growing
financial burdens
and declining rates of investment far sooner. Public obligations
to savings and
loan depositors in troubled S&Ls, for example, would have shown
up in l985, when
the sum was $25 billion and the bleeding might have been stemmed,
instead of
l990, by which time the crisis was draining $200 billion a year
from American
taxpayers. The nation's simultaneous drop in net government
investment would have
been clear shortly after l987, when it was $30 billion, instead
of l991, by which
time it had shrunk to a mere half billion.

A cynical response is that, while all this may sound logical, the
categories and
the rules can be circumvented with ease by clever budget
manipulators of which
there is no scarcity the administration and on Capitol Hill.
Politicians will
find any possible means of placating constituents in the short
run while putting
off burdens and responsibilities until they can no longer be
ignored. Thus,
regardless of how rigidly the categories are defined, much
current spending will
magically be transformed into "investments," and retirement
surpluses will become
new sources of revenue thus neatly avoiding tax increases and
shifting the burden
to future generations.

Anyone familiar with the recent history of self-imposed budget
limits would
findthis criticism entirely plausible. But what is the
alternative? Even such
seemingly air-tight rules like a balanced-budget amendment to the
Constitution
can be circumvented with ease, depending upon how various
expenditures and
revenues are defined and when they're counted. The best
constraint on budget
manipulation indeed, the only constraint is an informed
public which
understands what the budget is supposed to measure. This is
precisely the problem
with the system now in place. Today, the public has no idea what
it should look
for in the federal budget, except a trumped-up number called "the
deficit." And
because the public has no idea, it can't distinguish budgetary
policies which
legitimately lower "the deficit" from pure gimmicks which hide
future burdens.

The virtue of a system such as the one I have outlined lies not
so much in its
logic per se, as in the power of that logic to enhance the
public's
ability to oversee government, and to assess its own priorities.
Citizens
understand the difference between consuming and investing,
between burdening
future retirees and future generations of Americans, and helping
them. But if the
public chooses the former, no budget can stand in the way. At
best, a budget is
a mirror revealing to society its collective choices for how
burdens and benefits
are to be allocated among its members and between generations.
Once revealed,
there is no alternative in a democracy but to rely on the
public's will. But
until revealed, there is no real democracy.



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