U.S. Economy-IV The Budget vs. the Debt
WOYTINSKY, W. S.
The U.S. Economy—IV THE BUDGET VS. THE DEBT By W. S. Woytinsky SINCE THE END OF World War II, the Federal Government has completed only three fiscal years with a surplus: in 1948 ($3.5...
...But whatever the origin, interest payments represent a serious financial burden for the nation...
...such a debt represents the liability of the corporation as well as its equity capital...
...Manipulation of the national debt, that is...
...or of goods produced in the private sector (military hardware, fuel, cement for roads...
...the relative value of imports and exports: the international transfer of capital, etc...
...It declares that an additional S400-$500 million would be collected by the repeal of the obviously unwarranted exclusion from private income of credits for dividends received...
...of this amount, about $80 billion matures within one year and $60 billion within one to five years...
...When a considerable part of the expenditure is covered by loans this no longer works...
...The purpose [of this practice] appears to be to present the illusion of a balanced budget and of a lower level of Government outlays and receipts than in fact exists'' Clearly, the idea of fighting inflation by planning a budget surplus is highly unrealistic...
...It should also be remembered that these factors cannot be measured with perfect precision...
...Thus, the double-edged problem of the Federal budget and the national debt is no more urgent now than it has been at any time since the end of World War II...
...Moreover, a financial policy guided by an obsession about balancing the budget, and a general economic policy dictated by the fear that economic growth will become "ultra-rapid," may shorten the spell of recovery, bring a downturn in business and increase the severity of the next recession...
...Expenditures of the public sector in the U.S...
...A sound financial policy demands a flexible equilibrium between public outlays and receipts, not only because a large budgetary deficit or surplus may endanger the stability of prices, but also because the burden of public expenditures must be adequately distributed among different groups of the people...
...In the prewar years, the national debt rose steadily under the impact of expanding Government activities...
...Despite tax cuts in 1946, this period saw a slight reduction in the national debt, but in 1951 the policy of unilateral disarmament had to be abandoned...
...his tory...
...3) by reducing Federal expenditures to a minimum at the risk of slowing down economic growth and lowering the yield of taxes directly related to the volume of economic activity...
...But the issue of a balanced or unbalanced budget is particularly serious with respect to Federal finances, because balancing the Federal budget is especially difficult and the Federal debt is much larger than the debts of other public au thorities...
...During World War I it reached a new peak, $25.5 billion ($212 per capita), but it was cut down to $16.2 billion ($130 per capita) by 1930...
...the incidence of taxation becomes highly confused...
...1 billion could be added to the treasury by stricter enforcement of individual income tax laws, and a like amount by improving and streamlining existing estate and gift taxes...
...In addition to everything else, a large national debt implies considerable annual payments of interest and a continuous turnover of Government obligations that pose difficult problems of debt management...
...The difference in the relation between the stock holders and the corporation and the holders of government bonds and the government is mainly in voting rights: In a corporation, votes are counted by the number of shares one owns...
...Moreover, all price rises took place in the preceding and following half-years when the deficit was comparatively small—another proof that prices are not closely related to a balanced budget...
...At present, in fact, it appears likely that 1961 will find the United States passing through an economic phase similar to those in 1949, 1953 and 1957-58...
...There were three ways to try to prevent further growth of the national debt: (1) by accelerating economic growth and thus increasing the yield of existing taxes...
...THE DEBT By W. S. Woytinsky SINCE THE END OF World War II, the Federal Government has completed only three fiscal years with a surplus: in 1948 ($3.5 billion), in 1956 ($1.6 billion) and in 1957 (also $1.6 billion...
...2) by closing loopholes in the tax laws to raise Federal receipts or, if this proved insufficient, by upping tax rates...
...More over, large amounts of Government bonds are maturing every year and the Treasury is compelled to replace them by new loans offered to the banks and the public...
...And, similarly, the Federal budget does not record all the fiscal and financial operations of the Government...
...The Korean campaign brought defense expenditures up to about $40 billion a year and the total Federal budget to $65.4 billion in 1952, $74.3 billion in 1953 and $67.8 billion in 1954...
...The public debt may be compared with the debt of a corporation to its stockholders...
...by stopping these practices, the Government could obtain an additional $800 million...
...economy by W. S. Woytinsky, who until his death in June was one of the country's leading economists...
...A deficit may result from a sudden contraction of the economy, as in 1930-33 and 1958, or a war emergency, as in 1942-45 and again in 1951-52...
...Nobody can predict whether in 12 or 18 months the nation will be threatened by inflationary or deflationary forces...
...Indeed, somebody must pay for each dollar the Government spends...
...when the national income was at the low point of $56 billion, the national debt increased to $22.5 billion, roughly 40 per cent of the national product...
...the national debt fluctuated below the limit of $100 million, or a couple of dollars per capita of the population...
...The public has been scared by its size —more than $1,500 per capita of the population, nearly 35,000 per worker...
...The demobilization brought temporary relief: Military expenditures shrank from $80.5 billion in 1945 to $43.1 billion in 1946, $14.8 billion in 1947 and about $12 billion in the next three years...
...The report also points out that at least $5 billion, and perhaps as much as $10 billion, of personal income in high brackets now escapes taxation by scandalous abuse of expense accounts...
...As the Joint Economic Committee points out in the report it released on January 26: "In the past several years, gimmicks and financing outside the budget have been used to mask or obscure the effects and costs of a number of programs...
...In the middle of 1940 it reached $43 billion, about 43 per cent of national product...
...Another $800 million could be obtained from withholding tax liabilities from interest and dividend payments...
...Gradual reduction of the national debt and especially of short-time obligations is therefore de sirable, insofar as it can be effected without prejudice to the basic targets of national policy: national defense with a reasonable margin of security, satisfaction of urgent economic, social and cultural needs of the nation, and maintenance and acceleration of economic growth...
...These are simple and obvious facts, but many people do not understand them, partly because a large national debt is a comparatively new phenomenon in U.S...
...These purposes usually involve the purchase of services (of government employes, the armed forces, etc...
...Here Dr...
...It is a sound policy to let moderate budgetary surpluses accumulate in the years of rapid economic growth, and to accept a budgetary deficit during economic setbacks...
...Marketable securities of the Federal Government now total nearly $190 billion...
...the ups and downs of building activities...
...which closed with a deficit of $12.4 billion—the highest peacetime deficit in our history...
...the disparity between the rise in money wages and profits, on the one hand, and the productivity of the whole economy, on the other...
...The Federal Budget...
...value added, profits, depreciation allowance, etc...
...If it collects more than it spends, purchasing power will not be sufficient to absorb the national product at production cost (which includes cost of materials...
...There are two schools of thought on the role of government in the national economy...
...When new loans are issued at a higher interest than the old ones, holders of old bonds cash them and purchase the new bonds, so that annual interest payments tend to increase even if the amount of debt remains unchanged...
...Obviously, too, if the Government spends more money for goods and services than it extracts from the private sector through taxes and compulsory contributions, a surplus of purchasing power may develop...
...A much larger disequilibrium may result from fluctuations in savings (by individuals and business...
...the second (NL, August 1-8) showed how this could be done...
...The national debt is often portrayed as a burden that threatens to crush our economy by its weight...
...The first school opposes government intervention in economic activities and demands complete reliance on private initiative...
...This is the final article in our series on the U.S...
...This culminated in the budget of fiscal 1959...
...It skyrocketed to $2.8 billion ($75 per capita) by 1866 and was gradually reduced to $1.2 billion ($12 per capita) by 1916...
...the third (NL, August 15-22) discussed inflation...
...It goes on to show that: $600 million could be raised by a stricter definition of what constitutes capital gains...
...Furthermore, all other conditions being equal, a moderate budgetary surplus or deficit, say within a range of 1 per cent of the national product, cannot seriously effect the relation between disposable purchasing power and the nation's supply of goods and services...
...Actually, the national debt is the debt of a nation to itself, the debt of the public sector to the private sector of the economy, justified by the services the public sector renders to the nation as a whole and guaranteed by the firm decision of the nation to preserve its way of life...
...Thus, while in the long run a balanced budget is de sirable, it should not become the guiding objective in the fiscal policy of a great country...
...This does not mean, however, that prices will necessarily rise when the budget shows a deficit and fall when it shows a surplus...
...1-$1.2 billion could be collected by reducing depletion rates allowed to oil and gas companies...
...essentially, they reflect the controversy concerning the relationship between the private and public sectors in the modern economy...
...changes in the amount of available credit...
...Neither the expenditures nor the receipts under the Federal highway program are shown in conventional budget...
...Other government functions entail the transfer of purchasing power to certain groups of the people, as in social security and social welfare programs...
...in a democracy, decisions are made by all eligible citizens, regardless of the number of bonds they possess...
...Groups that minimize the government's role in these fields are inclined to curb its activities by fixing a ceiling on its expenditures...
...Two-thirds of this amount is carried by the Federal budget (including withdrawals from insurance trust funds), one-third by state and local governments...
...In the past 30 years, there has not been any close correlation in the United States between the balance of the budget and movement of prices...
...All in all, the report estimates that Federal receipts could be increased by $4 billion to $5 billion annually without either new taxes or a sizable increase in existing tax rates...
...Thanks to World War II, Federal expenditures rose from $9.1 billion in 1941 to $98.4 billion in 1945, while receipts rose less rapidly, from $5.1 billion to $44.5 billion...
...To these factors should be added price manipulations by big companies...
...Some people have been made to believe that repaying the national debt is a more urgent task than improving the educational system, developing natural resources, or even closing the gap in national defense...
...In that event, what will be needed is an anti-deflationary rather than an anti-inflationary financial policy...
...Such improvement in the fiscal system is, of course, preferable to the accumulation of a deficit...
...the lag in production growth...
...The first article (NL, July 18-25) pointed up the need for increasing economic growth...
...In these operations goods and services are not diverted from the private to the public sector of the economy, they are simply redistributed within the private sector...
...The fiscal system distributes this burden and tends, in a democracy, to allocate the share of each group of individuals according to its ability to pay...
...In both cases, the government must cover its expenditures by fiscal measures, and the larger the government's role in the flow of national income the more difficult becomes its task of acquiring the necessary funds without unduly burdening individual taxpayers and business...
...This difference in views necessarily implies a difference in handling financial problems...
...The Eisenhower Administration chose the last...
...The difference is not between free spending and a concern about the use of taxpayers' money, but in evaluating expenditures in terms of the government's responsibilities and the urgency of its economic, social and cultural targets...
...Before the Civil War...
...Woytinsky analyzes the relationship between the budget and the national debt...
...In other words, as has been repeatedly demonstrated in this series of articles, a dynamic economy demands cooperation between the private and public sectors, and a Government fully aware of its historical responsibilities, ready to respond to any challenge and unafraid to be great when the time calls for greatness...
...A surplus may result from the shift to a peacetime economy, as in 1946, or the drastic reduction of Government spending...
...Thrift became the overriding commandment of the new financial policy...
...The second school favors streamlining the economy by the injection of public initiative and controls when they serve the national interest...
...The United States emerged from the war with a national debt of more than $290 billion, a huge defense budget and new commitments—interest on the public debt and payments to veterans...
...National Debt...
...The report of the Joint Economic Committee pointed out that Federal receipts can be increased without raising tax rates simply by improving the methods of collection, closing some loopholes, and stopping tax evasion in the upper income brackets...
...Interest payments now run at about $7.5 billion annually, and since the bulk of the national debt has been accumulated during the wars, this item may be considered as delayed military expenditures...
...currently absorb 30-35 per cent of the national product (in 1957, $126.4 billion out of a total national product of $440.3 billion...
...The Federal Government was again in the red...
...This disequilibrium may exert either an inflationary or deflationary pressure on prices...
...Those that hold the government responsible for progress in these fields seek to obtain the necessary budgetary receipts by utilizing available fiscal resources most effectivly and by boosting economic growth...
...balancing the budget with a reasonable surplus of deficit, may also be used as a means of ironing out cyclical fluctuations in the national economy...
...The national debt, mean while, has been inching upward, but its ratio to the national product has declined as a result of the latter's growth (at current prices) from 111 per cent in 1947 to 71 per cent in 1953 and 59 per cent in 1959...
...This situation creates serious difficulties for the Treasury...
...In the long run, therefore, sound financial policy demands a flexible equilibrium between public receipts and outlays—in other words, a balanced budget...
...The most effective way to reduce the burden of the national debt for future generations, however, is to cut its relative weight in comparison with the current national product by accelerating the latter's growth...
...The BLS consumer price index, used to indicate the predominance of inflationary or deflationary forces in the nation, provides only rough measurement...
...One government function is to divert part of the national product from objectives determined by income recipients to purposes approved by the nation through due legislative and executive procedures...
...As far as impact on the private sector is con cerned, Federal expenditures do not differ much from those of state or local governments...
...By 1933...
...The principle of adequate progressive taxation, therefore, demands that deficit financing be used sparingly and only in emergencies...
...the growth and decline of inventories and real investment...
...The budget is a systematic statement of fiscal and financial operations...
...It is highly doubtful, however, that this deficit was a major cause for the rise of prices in this period, since almost the whole deficit was accumulated during the second half of calendar year 1958 when prices were fairly stable...
...Nothing that has been said here, of course, should be regarded as an endorsement of reckless deficit spend ing...
...Along with inflation, however, it seems to be a major issue in this year's Presidential campaign...
Vol. 43 • August 1960 • No. 33
