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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