How Real Is the Federal Deficit?

Eisner, Robert

Suppose he'd listened to the erudite committee. He would have only found where not to look. óW.H. Auden On February 24, 1983, the flower of the American Establishment published a full page...

...According to the book's jacket, "Robert Eisner is William R. Kenan Professor of Economics at Northwestern University...
...On the other hand he concludes that the "balanced budget" projected by Gramm-Rudman would actually produce in 1990 not a balanced budget but a "fully inflation-adjusted" surplus of 0.34 percent of GNP, or, if measured by the "high-employment budget," of $114.4 bilUon...
...The politics of Gramm-Rudman notwithstanding, a budget balanced by current federal rules of accounting is an invitation to economic disaster...
...Therefore, it behooves conservatives to read, mark, learn, and inwardly digest the words of Professor Eisner, before agreeing to cuts in the defense budget in the idolatrous service of the balanced budget...
...For those assessments, he seems to rely exclusively on adjustments for inflation...
...For a simple reason: his figures are consistent with the economic history of the United States since 1945...
...Eisner's enormously valuable book can be faulted only on a few counts: First, its message is not easily accessible...
...Robert Eisner and his colleague Paul Pieper have constructed government balance sheets which show the market values (or estimated replacement costs) of all tangible and financial assets of the federal government as well as its liabilities...
...The deficits usually talked about result from only one way among several of presenting the national budget, and that may well be the least realistic and useful one...
...Ttue, there were rising interest rates and prices in the 1970s, but according to Eisner these were due not to excess demand, but mainly to huge increases in the cost of energy inflicted on a spineless West by OPEC...
...The federal government has often been in a situation similar to that described in this illustration...
...If the real value of debt, measured in constant dollars or purchasing power, is considered, nominal deficits may not only not increase the debt but actually decrease it...
...catastrophe...
...Finally, at the end of his book Robert Eisner leaves us with a dilemma...
...For some time state and local governments have been accumulating surpluses...
...Professor Eisner does not tell us...
...But it would appear that a Congress which has demonstrated its inabiUty and disinclination to tackle the budget, to say nothing of doing so promptly, might well be persuaded to delegate to the executive branch the authority to impose a surtax on the personal and corporate income tax when a pre-determined boiling point of the mixture of full employment and optimal use of industrial capacity is reached, and to Uft that surtax when the mixture has cooled down again...
...Those balance sheets show that the government's net worth increased from minus $12 billion in 1945 to plus $381.8 bilUon in 1980ówithout adjusting for inflationóbut had decreased in 1984 to minus $58 biUion...
...In particular they explain why the Carter years produced the worst recession since the great depression as well as the highest rates of interest and inflation in recent memory...
...This is just another aspect of the truth that inflation imposes additional taxes on people because it reduces the value of their savings...
...Inflation reduces the real value of that debt burden in two ways: first, higher interest rates resulting from inflation reduce the market value of those securities, and, second, that reduced market value in turn is diminished by the lesser purchasing power of the dollar...
...But suppose, in the meantime, the value of a dollar has fallen by 10 percent because of inflation...
...Such bookkeeping makes little sense...
...Indeed, many profitable corporations would be in the red, if they followed the accounting methods used by the federal government...
...Since a voice crying in the wilderness is usually attributed to a charlatan, it is useful to establish Professor Eisner's sobriety before summarizing his findings...
...high interest rates, stagnation in employment and capital growth, and general economic "havoc" were predicted unless "immediate action" to reduce the federal deficit was taken...
...To make budget figures relevant, Eisner recalculates them by adjusting them for inflation...
...In short, there is nothing queer about Eisner other than his views on the deficit...
...Its prose is often forbidding, its sequence of ideas is not always easy to trace, and its text can sometimes be reconciled with its tabular data only by considerable effort...
...Yet the increase in the material well-being of the people of the United States during those years has been almost miraculous...
...As mentioned above, the budgets of the Carter years were actually in surplus, and the budget figures, as corrected by Eisner, show real deficits only from 1981 on: $18.3 billion in that year, $177 billion in 1982, $101 billion in 1983, and $154 billion in 1984...
...Did our total debt then, in meaningful economic terms, or in dollars of constant purchasing power, rise by $5,000 or fall by $5,000...
...What, then, is to be done...
...Even if some aspects of Eisner's analysis should be shown to be debatable, Eisner's book leaves no reasonable doubt that the daily portion of grief administered to all of us by the network news, most economic soothsayers, and foreign critics of the United States economy is based on data so simplistic as to amount to disinformation...
...Thus two years after the manifesto of Februeu-y 1983, and after nineteen years only seven of which had not shown an official deficit, the government's net worth had not materially changed: from minus $19.5 billion to minus $25.4 billion...
...He demonstrates in historical detail and many tables that real deficitsóby putting money in people's pocketsó increase the gross national product, increase employment, increase the Dow Jones, do not "crowd out" credit to the private sector, do not push up interest ratesóin short, they produce just the opposite effects of those predicted in the 1983 manifesto, so long as, and only so long as, there is less than full employment and less than optimal use of industrial capacity...
...Clearly deficits caimot be all bad...
...In order to apply this test of consistency, the predictable consequences of budgetary surpluses and deficits must be understood, and Eisner's book devotes considerable space to that task...
...Had the Reagan Administration followed the counsels of David Stockman and the drafters of the 1983 manifesto, it would have treated the economy like a doctor who administers a bleeding to a marathon runner exhausted Iqr dehydration...
...The results of these adjustments are dramatic It is impossible within a review essay to enumerate all the revolutionary changes produced by Eisner's analysis...
...On the one hand he recognizes that the real deficits of today, as opposed to the theoretical deficits before 1981, cannot continue indefinitely without rekindling serious inflation...
...Auden On February 24, 1983, the flower of the American Establishment published a full page manifesto in the New York Times that came as close to the voice of a pope speaking ex cathedra as a secular society permits...
...In short, our real debt declined, and we had a surplus, not a deficit...
...For Eisner such a prospect is at least as bleak as inflation: One cannot properly counsel budget balancing in an economy with unemployment still near 7 percent and real economic growth well below its potential...
...E ssentially, according to Eisner, deficits must result in corresponding increases in the national debt...
...Different ways of measuring and assessing deficits result in different figures...
...The official aggregate deficit of the four Carter years, 1977-1980, of $157.2 billion becomes an aggregate surplus of $72 billion...
...A Fellow of the Econometric Society and the American Academy of Arts and Sciences, he has served as Vice President of the American Economic Association and President of the Midwest Economic Association and is on the editorial board of several major economic journals...
...Professor Robert Eisner's new book shows why this conventional wisdom and past predictions of doom have been wrong...
...If the total federal investment, as defined by the Office of Management and Budget (OMB), of $171 biUion in 1984 is deducted from the official deficit of $180 billion, the deficit would virtually disappear...
...Among the signers were seven former secretaries of the treasury, other former cabinet officers, chief executives of the largest American corporations, senior partners of the best known law firms, prominent bankers, and even economists...
...He was also chairman of the economics department at Northwestern...
...Professor Eisner lays greater stress on the difference between current and capital outlays of the federal government which, "unlike private business and state and local governments, keeps no separate capital budget...
...That, in effect, cuts the real burden of our existing mortgage debt to $90,000 just as surely as if, without the inflation, we had somehow paid off $10,000...
...Ikking into account these effects of inflation on the national debt, and applying the principle that real deficits must correspond to increases in the nationsd debt, Eisner concludes that "our conventional measures of the budget deficit are devoid of much of their presumed economic relevance...
...The gross d e b t . . . of General Motors grew from $4.3 billion to $27.9 billion from 1970 to 1984," that of IBM from $2.6 billion to $16.3 bilUon during the same period...
...If those surpluses are deducted from the federal deficits during those years, no matter how the deficits are measured, they are reduced by about onethird...
...Thus, for instance, if a $10,000 government bond may be bought for $9,000, those $9,000 in turn can now buy less than they could have bought when the $10,000 bond was issued...
...The recession of 1982, the worst since the great depression, not yet over then, was partly attributed to a "loose budget...
...It is also puzzling why Eisner, having alerted us to the significance of the federal government's capital outlays and of the budgets of state and locid governments, fails to include those two factors when assessing the true impact of the budget...
...in 1984 and 1985 they amounted to about $60 bilUon a year...
...The most original and significant change Professor Eisner proposes for the presentation of the federal budget involves proper accounting for the effects of inflation...
...Professor Eisner mentions only in passing one major economic fact often overlooked: the impact of state and local governmental surpluses or deficits on the meaning of the federal deficit...
...The federal budget, as conventionally measured, has been in deficit in all but eight of the fifty-five years from 1931 to 1985...
...Eisner's book discusses two other methods of presenting the budget (i.e., other than the "official" or "unified" budget): the national income and products accounts (NIPA) that exclude certain receipts and expenditures, and a budget adjusted to remove the effects of cyclical fluctuations in income and employment, variously called the "fullemployment, " "higher-employment," "standardized-employment," "cyclically adjusted," or "structural" budget...
...In 1980 the "monstrous" deficit of $61 billion becomes a surplus of $7.6 billion...
...During inflationary periods those investments increase in dollar value...
...His article, "The Banking Revolution," appeared in the March 1985 American Spectator...
...Thus "when the federal government makes . . . capital expenditures of $77 billion, as it did in [fiscal year] 1984, that goes right into the deficit...
...He reminds us that there is a deficit only if there is an increase in debt...
...The language of the manifesto was extravagant: it spoke of crises and disaster and presented "A Program for Immediate Action" to avert economic Franz M. Oppenheimer, a frequent contributor, is a Washington lavi>yer...
...Capital expenditures for highways, ports, housing construction, and post offices are made not for the fleeting moment but for years to come...
...We now know that no such action was taken and that no havoc occurred...
...Clearly the way in which deficits and surpluses are distributed between federal and local goveriraiental budgets makes little difference in how the deficits affect the economy...
...That debt is held in the form of government securitiesóbonds, notes, billsó most of which are in the hands of the public or of governmental entities, like the Social Security and employee pension funds that must invest their cash...
...In essentials Eisner is a Keynesian...
...A few illustrations must suffice: In 1968, one of the years which supposedly laid the foundation for the inflation of the seventies, the official deficit was $6 billionóadjusted for inflation (i.e., for the effects of higher prices and higher interest rates) that deficit of $6 billion turns into a surplus of $6.5 billion...
...The first and most important thing we learn from him is that the federal deficit does not constitute a simple, concrete, and unquestionable fact...
...Thus, to quote Eisner: If we already owe $100,000 on a mortgage loan on our home and then borrow to spend $5,000 more than our income, our total debt of course rises to $105,000...
...Yet politicians and the media continue in their attempts to persuade Americans that the federal deficit constitutes a grave, if not the gravest, threat to the security of the republic...
...These first deficit years were the years during which the recession, inflation, and high interest rates inherited from the surpluses of the Carter years were overcome by budgetary deficits...
...It is not necessary to dwell on these variations to do justice to Eisner's theses, apart from noting that each of these two variants of the budget can in turn be adjusted by Eisner's method for the effects of inflation, and that the very existence of these variations makes nonsense of the simple-minded notions about the deficit bandied about every day...
...The subject addressed was the federal budget deficit, past and predicted...
...Why should we believe in Eisner's corrected budget figures that stand all our certainties on their head...

Vol. 19 • November 1986 • No. 11


 
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