Charting America's Future: The Budget Balancing Act
TYLER, GUS
CHARTING AMERICAS FUTURE BY GUS TYLER 7. THE BUDGET BALANCING ACT At every stage in the growth [of government debt] it has been seriously asserted by wise men that bankruptcy and ruin were at...
...then it gradually fell to 158 per cent and inched up again to 196 per cent in 1976...
...In the relatively quiet period that followed, the figure fell to $45 million...
...In such an equation, increased demand is balanced by increased supply and the cost of money (the commodity under consideration) should remain constant...
...In 1920it was $1.48: $1 (148 percent...
...That's why the ratio between debt and GNP is of far greater relevance than the absolute size of the debt...
...His conclusion is neither logical nor factually correct...
...By 1955 the ratio was down to 57 per ceni...
...Let us examine both propositions, beginning with the latter...
...A penny spent, after all, is a penny earned by somebody...
...interest on these borrowings exits one pocket of Uncle Sam and enters another...
...Twelve days later, he reiterated: "I believe the budget can be balanced by 1982or 1983...
...If the economy is growing, public and private borrowing may increase without in any way affecting the debt-income ratio...
...On November 26, Budget Director David A. Stockman stated: "I don't think anybody's talking about literal accounting balance or making a fetish" of a balanced budget...
...Finally, interest paid on debt is a big waste...
...Indeed, in such a process the government is in exactly the same position as the corporation that floats a huge bond issue to expand its enterprise and increase its income...
...As for the Federal debt's portion of the entire indebtedness in the country, in 1976 (the last year the Current Survey of Business ran the series) it was only 18 per cent...
...THOMAS MACAULEY In the United States, government debt has honorable forebears dating back to the first Administration of George Washington...
...By definition, a "capitalist" is someone who possesses capital and prospers by making it available to the society at a price...
...The military expenditures to insure peace cost no less than to wage war...
...Adjusting for prices makes little difference: Between 1900-70, prices multiplied by a factor of 50, while the Federal debt multiplied by a factor of 350...
...It is obviously not the case, therefore, that Uncle Sam is crowding out the private sector from the capital markets...
...Accumulating deficits under Democrat Grover Cleveland and Republican William McKinley, quickened by the Spanish-American War (1898), pushed the debt to $1.5 billion by 1899...
...Chief among these are banks that routinely place ads urging people to borrow from them because they are faster, friendlier, fairer, or whatever else it is necessary to be to induce people to incur debt...
...When America entered the 19th century, Thomas Jefferson promised (1801) to wipe out "his [Hamilton's] debt," but didn't...
...Soon Reagan's aides were making further modifications...
...A current complaint against government debt is that the interest charges are backbreaking...
...in his History of England, would observe: "This great philosopher had only to open his eyes, and to see improvements all around him, cities increasing, cultivation extending, marts too small for the crowds of buyers and sellers____His prediction remains to posterity a memorable instance of a weakness from which the strongest minds are not exempt...
...As receipts returned to normal the next year, budgets were balanced and the Federal debt was cut in half—until another war came along, this time with Mexico...
...This could easily be absorbed in boom times...
...Simple consumer debt—the kind run up by the man or woman in the street—multiplied 27 times over...
...Whether that return on capital is called "interest," "rent" or "dividends" is secondary...
...The poor Republican performance is not due to any decision by the more business-oriented party to encourage debt...
...This was t he beginning of an indebtedness in Britain that—as in the United States from the days of Washington—would grow and grow...
...Commercial banks hold 11 per cent, savings banks 8 per cent, and some of that money produces returns to the government—as in the tax on savings account interest or on bank profits...
...Two weeks afterward, however, on February 18,1981, the President began to make revisions...
...Deficits in 1847-49 pushed the debt to $63 million...
...16 per cent by a category known as "others," like insurance companies and pension funds that provide capital for production or consumption...
...The Reagan experience provides a perfect example of the last point...
...So interest expenditures are not just money down the drain...
...They made no allowance for the effect produced by the incessant progress of every experimental science, and by the incessant effort of every man to get on in life...
...how the money is used is what makes the difference...
...Ronald Reagan is expected to run up a larger deficit in only two years...
...Thanks to the prosperity and peace that followed, the debt dipped below the $1 billion markby 1893...
...and I believe that it can provide for a balanced budget by 1983, if not earlier...
...with receipts dropping from $74 million in 1856 to $41 million in 1861, total debt rose to $93 million...
...This drive is not some lapse from grace on the part of the businessman...
...Only 14 per cent is held by foreigners, and many of them undoubtedly invest in U.S...
...We all speak the same unspoken prayer at the shrine of that two-faced God: "Give us this day our daily debtor that he may give unto us as we have given—oops, loaned—unto him...
...Recovery this time continued to World War I. In two years, however, a deficit of $22 billion was chalked up, raising the total debt to $25.5 billion...
...and they forgot that other things grew as well as debt...
...Inflation boosted all costs—for butter, for guns, for borrowed money...
...Our experience as a country ought to discourage future candidates from making such promises...
...Second, huge debts were incurred long before FDR was born or Lord Keynes mumbled a syllable...
...A year after he entered the White House, Reagan's balancing act—a series of counterproductive policies that tossed an already troubled economy into turmoil—gave us a budget more out of whack than any in the nation's history...
...In the more business-minded, war-free Republican fiscal years of Eisenhower (1953-61), the cumulative deficit was $15.8 billion...
...By 1863 the Federal debt exceeded $1 billion for the first time in the nation's history, and by 1866 it was approaching $3 billion...
...Government borrows to provide a market, whether the money goes for veteran pensions, food stamps, college loans, or the purchase of arms...
...The Civil War, like other wars, lifted the country out of the depression...
...The debt-income ratio keeps changing constantly, sometimes sharply...
...On September 21, the new target date was restated: "This administration is committed to a balanced budget, and we will fight to the last blow to achieve it by 1984...
...That brings us to the Great Depression...
...No matter how much Democrat Martin Van Buren or Whigs William Henry Harrison and John Tyler cut spending, deficits proved unavoidable, and added up to $32 million by 1843...
...Not necessarily, if the total amount of credit available expands...
...Even the distinction between "profit-making" and "nonprofit-making" proves invalid when one penetrates the semantic veil...
...In the second month of his Presidency, on February 3, 1981, he reaffirmed his timetable: "One of the things I have not retreated from is the 1983 target...
...by 1933, the depth of the Depression, it hit 303 per cent...
...The balanced budget is a staple of campaign cacophony—just as it is a regular rite for Congress to establish a debt ceiling and, with equal regularity, to raise it (between 1978-82, the limit was increased five times...
...Private borrowing is deemed productive because the money is used to erect factories, employ people and turn out products...
...and this analogy led them into endless mistakes about the effect of the system of funding...
...Reagan's tragedy, like all true tragedy, derives from the best intentions of the hero landing him in a Hell of his own making...
...In the 20th century, Franklin D. Roosevelt assailed the spend thrift ways of Herbert Hoover, then went on to outspend him...
...Several lessons emerge from this swift survey of our financial chronicle...
...As heneared the election, in the last week of October, he became more specific: "I have submitted an economic plan...
...The shaky economy he inherited was thus shaken still more as real GNP stopped growing, unemployment rose and bankruptcies multiplied...
...Third, and most significant as we prepare for the future, budgets are balanced less by good intentions than by good times—which can often be won or lost by the fiscal (and monetary) actions of the government...
...Consequently, Reagan's total expenditures (military plus civilian) were greater than Jimmy Carter's...
...The War of 1812 shook things up, so that by 1815 the debt hit $127 million...
...On March 2,1982, speaking to the Los Angeles County Board of Supervisors, he swept aside all pretense of being able to balance the budget: "The deficits we propose are much larger than I would like...
...Tidy housekeeping is proof that the officeholder is not wasting public funds, or diverting the people's pennies into corrupt channels...
...This is partly true in a time of artificially high interest rates...
...by 1930, an early depression year, it had risen to $2:$1 (200 per cent...
...A bank does not focus on how much you want to borrow, it is concerned with how much you make...
...In the same period the Federal debt only doubled...
...If the economy were running at 100 per cent of capacity, instead of between 70-75 per cent, the GNP would be about a trillion dollars greater, adding some $200 billion to the Federal coffers and more than covering the enlarged military outlays—just as Truman had paid for the cost of the Korean War while showing budgetary surpluses...
...Democrat Jimmy Carter's budgets (1978-81) hit a total deficit of $201 billion...
...There are three ways to measure the Federal debt: in absolute numbers, (whether in current dollars or in constant dollars adjusted to pricechanges), as a percentage of the Gross National Product, or as a percentage of all indebtedness in the nation...
...By 1939 the debt was more than $40 billion, and the wars arrived: World War II, Korea, Vietnam—plus, in "peacetime," a standing Army and expanding armaments to assure readiness in a bellicose world...
...The government set up an untouchable sinking fund to promptly retire both principal and interest...
...In the Truman fiscal years (1947-53 inclusive), there was a net surplus of $10.6 billion despite the costs of the Korean War...
...Most of them were quite undistinguished, perhaps because they lived in undistinguished times: no wars, no depressions, no severe inflation...
...They arecrumbs "cast upon the waters," since at least 86 per cent of that money goes either directly to the government or to American individuals and institutions who invest here, buy here and pay taxes here...
...Nonetheless, business wants to incur more debt, as it declares unabashedly in public statements demanding that Uncle Sam borrow less so that business may borrow more...
...Inevitably, Federal revenues lagged—especially after the 1981 tax cut...
...Okay, one may say, it is possible for government and private debt to grow simultaneously in absolute amounts and as percentages of the GNP, but that must force up interest rates...
...Schwarz...
...The brilliant Scot, David Hume, concluded that the nation had gone mad and would soon be bankrupt...
...Hence, at the summit of our society stand our most respected institutions serving as the priests of this Mammonlike religion...
...The same day, the President readjusted his rhetoric: "I've never said anything but that it [a balanced budget] was a goal...
...It started in the millions, then went to billions and now is up to trillions...
...As Reagan had put it on May 17, 1980: "We would use the increased revenues the Federal government would get from this tax deduction to build our defense capabilities...
...in 1982, he is shouldering a load merely one-third as heavy as he is...
...It was supposed to put capital into the hands of investors, who would use their new-found riches to build plants and employ people...
...It was supposed to bring great gobs of income into the U.S...
...Ten days later, he withdrew his commitment: "I did not come here to balance the budget—not at the expense of my tax cutting program and my defense program...
...The fiscal policy that hastened this catastrophe was, according to Reagan's reckoning, supposed to do exactly the opposite...
...There have of course been Presidents of the United States who did manage to balance the budget...
...Consider what happened to Ronald Reagan as he performed his budget balancing act...
...The GOP failure is mainly the result of stultifying policies that slow total economic growth, lowering the revenue and raising the costs of government...
...Finally, mea culpa, you and I—if we have a savings account—encourage debt by simply insisting that our bank pay interest on our deposit—something the bank can only do by getting someone to incur debt...
...And that is an overstatement because the money flowing out of the Treasury to pay interest charges ($100 billion) flows back into the economy in many ways—not the least being the generation of government income...
...We are expected to "live within our means," we are advised by Poor Richard that "a penny saved is a penny earned," and we are fond of boasting "I owe nobody nothing...
...The other 82 per cent was eaten up by corporations (42 per cent), individual and unincorporated enterprises (32 per cent), and state and local governments (7 per cent...
...Of the four categories composing the total debt, the slowest growing one in the period 1940-76 was the Federal debt with a 12-fold rise, whereas state and local debt rose 15-fold, corporate debt 19-fold, and individual and unincorporated enterprises 20-fold...
...Another common myth is that private borrowing goes for productive purposes and government borrowing is unproductive...
...Lacking the input of government, our economy—to quote the late William Saroyan—would be without "a foundation all the way down...
...Actually, the crowding out myth is based upon another myth—namely, that there is a fixed ratio between total debt and the Gross National Product...
...Then came the collapse of farm prices in a nation that was still predominantly agricultural...
...In reality, though, there is no fixed relationship between total debt and the GNP...
...Revenues multiplied 10 times over, from $51 million in 1862 to $558 million in 1866, but wartime expenditures grew faster...
...In sum, greater Federal borrowing need not crowd out the private borrower, nor raise interest rates, and prices, in an expanding economy...
...The preceding pieces in th is series were: "The Great Debate''(NL, November30, 1981), "Those New Deal Years (1933?1938)"(NL, December28,1981), "Undoing the New Deal (1939-1981) " (NL, January 25), "Responses-1 " (NL, February 8), "The Roots of Stagflation" (NL, February 22), "Responses-2" (NL, March 8), "The Politics of Productivity" (NL, March 22), "Re-sponses-3"'(NL, Aprils), and "Supply-Side Trickle-Up" (NL, April 19...
...Private and public borrowing are alike in another respect, too...
...In 1945, in other words, Uncle Sam was carrying a weight heavier than himself...
...The cost to the government for this one item was $25.6 billion in 1982, about one quarter of the total deficit Washington will roll up for the year...
...Let's grant the point, although this is not always true...
...Corporations are, of course, by definition generally profit-making institutions and governments are not...
...Solid surpluses were shown by Franklin Pierce, Rutherford B. Hayes, James A. Garfield, Chester A. Arthur, Benjamin Harrison, Warren G. Harding, and Calvin Coolidge...
...The question is not a new one...
...Yet Thomas Macaulay...
...a generation later Andrew Jackson hoped to have a surplus he could share with the states, but couldn't gather it...
...It is bound to do so, however, in a repressed or shrinking economy...
...Yet, far more so than their liberal counterparts, the preachers of the balanced budget turn out to be practitioners of public deficits and promoters of private indebtedness...
...by 1975, for every dollarof private debt, the Federal debt was down to only 20 cents...
...What we find is that the absolute Federal debt has clearly grown in current and in constant dollars...
...The return to "normalcy" in the 1920s saw the debt gradually recede to $14 billion in 1930...
...Instead of a boom we got the gloom of a run-on recession...
...As increased unemployment shrank Federal funds (1 per cent of joblessness sets back the government $25 billion), additional expenditures went to maintain farm prices in an inflated market, and expensive direct and indirect subsidies were needed to rescue other sectors of the economy (like savings banks) from default...
...If other forms of debt had increased as slowly as Federal debt, total indebtedness today would be a fraction of what it is...
...In 1945, when the GNP was $210 billion, the Federal debt was $250 billion, or 119 per cent of GNP...
...The variation on this theme is that private debt is profitable, so it pays for itself...
...The masters of the private world do not wish to share that power with the masters of the public world, especially when the latter do not see things through the eyes of the former...
...Insurance companies and Wall Street investment houses dispatch agents around the world to persuade whole nations to incur debt...
...As a percentage of the GNP, corporate debt rose from 40 per cent in 1945 to 82 per cent in 1976, and seems well on the way to becoming a sum equal to the GNP...
...The debt was down to $26 million when the "Panic of 1857" hit...
...CHARTING AMERICAS FUTURE BY GUS TYLER 7. THE BUDGET BALANCING ACT At every stage in the growth [of government debt] it has been seriously asserted by wise men that bankruptcy and ruin were at hand____The prophets of evil were under a double delusion...
...The primary point is that capital is made available with the expectation that there will be a return...
...They erroneously imagined that there was an exact analogy between the case of an individual who is in debt to another individual and the case of a society which is in debt to a part of itself...
...If a corporation borrows a big sum simply to increase the salaries of its executives and then pays no attention to its market, it will soon go bankrupt...
...The reasons go beyond an aversion to debt as inherently sinful...
...Which takes us to Thomas Macaulay's first proposition—that it is an error to equate "the case of an individual who is in debt to another individual and the case of a society which is in debt to a part of itself...
...Culturally, too, the American character takes unkindly to borrowing...
...The pendulum was again s wi ng-ing in the opposite direction when the depression of 1907 struck, sending deficits up at an average rate of $55 million ayearfor the next three years...
...Debt per se is neither good nor bad...
...The Federal government is even ready to put itself in hock to stimulate debt in the private sector...
...What was supposed to happen, though, did not happen...
...And when President Reagan this year spoke of a trillion dollar debt, he was speaking of a sum that was only 33 percent of the GNP...
...Debt is abhorred as economically pernicious...
...public debt yields no profit, so it is an eternal drag on future generations...
...In the period 1945-82, only eightyears show surpluses: 1947-49 and 1951, under Harry S. Truman...
...Subliminally, the citizen equates these homely virtues with getting the most for his money, with lower taxes...
...on the contrary, it is a worshipful homage to the Supreme Power of a free enterprise (capitalist) society...
...So we all of us who still have a few pennies to invest end up worshipping the debt deity...
...The newborn nation was eager to establish a good credit rating, so it went into hock...
...By fiscal 1984," said the White House, "under the policy recommendations presented in this document, the Federal budget should be in balance...
...Fourteen per cent of the debt is held by individuals who, after receipt of interest, commonly either spend it or invest in something productive, bringing back income to the government...
...They go to building and maintaining the infrastructure that enables the private sector to function?the highways, harbors, canals, railroads, airports, airlines, bridges, reservoirs, forests, electric power, dams, research, etc...
...Nevertheless, the cost of servicing the Federal debt is far less than it seems...
...Granted, America was not technically at war during Reagan's first year...
...Previous Administrations had ended up in the red because of wars, recessions or inflations...
...But meanwhile debt, that Devil in the public sector, is celebrated in the private sector as the Deity...
...To begin with, our government is its own biggest creditor: About 35 per cent of the Federal debt is held by the Federal Reserve and by a variety of government trust funds, such as Social Security...
...The crux for both corporation and government is not whether money shall be borrowed...
...On December 6, Treasury Secretary DonaldT...
...consequently, "if the government raises spending, financing it with debt, the private sector will be crowded out...
...They were under an error not less serious touching the resources of the country...
...It won't...
...But the funds governments borrow are also put to productive use...
...Yet in terms of the budget, the nation might as well have been...
...In the years 1945-76 (the latest figure available), corporate debt multiplied almost 17 times, rising from $85 billion to $1.7 trillion...
...With war's end, the budget was balanced and the total debt virtually disappeared, descending to a mere $38,000 in 1835...
...The buyer pays a rate on that loan that is generally much higher than he could afford if he were not permitted to take a tax deduction for mortgage interest...
...But despite Reagan's eagerness for growth, he pursued a course that blocked any boom...
...If the government borrows money and uses it wisely—specifically, to stimulate the economy by stepping up purchases or by encouraging appropriate production—it will "profit" by an increased flow of income into the government coffers...
...In 1945, for every dollar of private sector debt, there was $1.80 in Federal debt...
...Home mortgages offer an example...
...The private sector borrows to consume, thereby providing a market for our industrial output...
...This mystical notion was recently restated by Benjamin Friedman, a highly respected economist: "Debt-income ratio has virtually remained unchanged since 1921...
...On the other hand, since the end of World War II America's ability to carry that burden has improved dramatically...
...They saw that the debt grew...
...He continued the Nixonian policy of trying to hold down prices by holding down the economy (see "The Roots of Stagflation," NL, February 22...
...In the Kennedy-Johnson years (1962-69) the cumulative deficit was $53.8 billion, a sum equal to 1.6 per cent of the GNP for that period...
...In addition, retail stores peddle installment buying, airlines urge us to fly now and pay later, auto manufacturers set up their own loan agencies, and financial institutions issue little plastic cards that allow all of us to steadily incur debt by a simple stroke of the pen...
...If a government borrows merely to enrich the rich and then proceeds to choke the economy with high interest rates, it will strangle itself...
...The debt Washington started with, over $72 million in his initial three years, was a burden from the American Revolution...
...But they are a necessary evil in the real world today...
...it is how the borrowed money shall be used...
...Consider the budgetary ups and downs since World War II...
...In an apologia for the projected 1982 shortfall, he explained that we must be ready to accept "a large deficit if that is what it takes to buy peace for the rest of the century and beyond...
...Should the GNP double, for instance, all kinds of debt could double and continue to maintain the same debt-income relationship...
...In 1932, Republican Hoover ran an annual deficit of $2.8 billion, representing a record high 4.6 per cent of the Gross National Product...
...Therefore, sophistry must convince us that debt in the palm of the private sector is holy water, while debt in the hands of government is poison...
...It was supposed to reduce Federal expenses through budget cuts that would make it unnecessary for Uncle Sam to compete with the private sector for scarce money...
...On September 9, 1980, he declared: "We must balance the budget ?I know we can do [it] and I know we will...
...Thus does debt, the Devil in the public sector, become the Deity in the private sector...
...And as America rolled on toward the 21st century, Ronald Reagan promised to end deficits only to end up with the biggest one ever...
...Upon the advice contained in Alexander Hamilton's Report on The Public Credit, it assumed responsibility for $11 million owed foreigners, $40 million owed American citizens, and the sums the individual states owed...
...If a corporation borrows money and uses it wisely, it will end up with a cash flow that can service its debt...
...In 1981, interest payments were only 13 per cent of the total budget and 3 per cent of the GNP...
...First, the United States government has always been in debt...
...and 1969, as a consequence of Lyndon B. Johnson's 1968 tax...
...Their inability to balance budgets irks Republicans who believe that Federal deficits are an evil that must be exorcised...
...As in so many other mystical transfigurations, the metamorphosis is mediated through sloppy syllogisms and slippery semantics...
...Regan announced: "Wewill not be able to achieve a balanced budget by 1984, but we will be on a path leading to a balanced budget...
...Look at the historical record and our daily doings...
...Likewise, the increased money supply (enlarged by outstanding credit) need not lead to inflation if the borrowed money is used to increase the supply of goods and services in the society...
...All the other 29 years show deficits, the progeny of international strife and domestic stagflation...
...In the subsequent eight years of GOP rule under Nixon-Ford(1970-78), the cumulative deficit was $201 billion, or 1.8 per cent of the GNP, although involvement in the Vietnam War was much deeper in the Democratic than in the Republican era...
...Government borrowing, it is said, "crowds out" the private sector by diverting funds from "productive" investment to "unproductive" pursuits...
...Further, just as private investment goes into physical capital, government investment goes into human capital—health, education, skill training, protecting property and persons against internal crime and external aggression...
...Stripped of all hocus pocus, the conversion of the Devil into the Deity is not beyond understanding: Money is power—including borrowed money...
...Candidate Reagan campaigned for office fully convinced that he could and would balance the budget...
...But is it...
...1956-57 and 1960, under Dwight D. Eisenhower...
...It therefore appears the pluses and minuses have far less to do with the ability or frugality of Administrations than with other forces affecting the economy...
...Yet both try to stimulate income—called "profit" or "revenue...
...Then came the depression of 1837, reducing Federal receipts from $50 million in 1836 to a measly $8 million in 1843...
...Voters like to hear candidates pledge fiscal frugality...
...On December 15,1692, in the British House of Commons, the Ways and Means Committee proposed raising $1 million by means of a loan...
...Capital seeks out companies, countries and consumers to convert them to the theology of debt: to borrow and to pay back with interest...
...A thin 2 per cent is held by corporations...
...In contrast, deep deficits were run up by Washington, Abraham Lincoln, Woodrow Wilson, and Franklin Roosevelt...
...And he hacked away at social programs that provided income for the nation's needy, further weakening the internal market...
...In the ever-recurrent debate over government budgets, it is customary to cast liberals in the role of visionaries whose bleeding hearts spill red ink, and to present conservatives as business types who "meet payrolls...
...A dollar expended in the market by Uncle Sam is as much a prod to production as a dollar laid out at the supermarket by your Aunt Tillie...
...In each of these surplus years, except 1947, Federal expenditures rose constantly...
...Hence, debt is a Devil...
...The weakness, Macaulay noted, wasdouble: the failure to realize a) that a debt one person owes to another is not the same as a debt a country owes to itself, and b) that a country is in no danger if its debt is not expanding faster than the total economy...
...Treasury...
...Uniquely, his had to cope with all three plagues simultaneously—plus a tax cut of his own making...
...He redistributed the national income through a tax bill that moved money from "consumers" (middle America) to "investors" (the economic elite), thereby weakening domestic demand, the sine qua non for economic recovery...
...As subsequent Administrations discovered, though, the best laid plans of mice and ministers gang aft agley...
...And no one has brought greater offerings to its altar than American corporations, or has more actively and effectively preached the Gospel of Debt than America's financial institutions...
...If we can't do it in 1984, we'll have to do it later...
...Competition for capital pushes up interest rates, causing both higher prices and industrial stagnation...
...Once more the end of the fighting brought budget surpluses...
...The government nevertheless ended up in the black because Federal income went up even faster, primarily, albeit not exclusively, due to an expanding economy...
...The Reaganite rhetoric has it that a deficit is evil perse, even when a "necessary evil...
...enterprises or buy baubles on Broadway or a posh panda at F. A.O...
...by 1965 to 38 per cent: by 1970 to 30 per cent...
Vol. 65 • May 1982 • No. 11
