How Real Is the Federal Deficit? by Robert Eisner (The Free Press: $17.95; 224 pp.)


If public debate and policy making about the federal budget deficit ever move beyond slogans and political posturing, some of the credit should go to Robert Eisner, professor of economics at Northwestern University. For several years now, in academic journals and on Op-Ed pages, Eisner has been doggedly analyzing the deficit in order to show that much of what presidents and politicians and the rest of us think we know about the subject is simply wrong.

This book incorporates some of his earlier work and goes well beyond it, including material on the alleged international effects of the deficit that President Reagan could have found useful at the Tokyo summit meeting. It is analytically solid, accessible to the general reader, and supported by tables, numbers and even a few formulas for Eisner’s fellow economists, most of whom admire his work even when they disagree with his policy prescriptions.

First, a warning for readers not familiar with Eisner’s writing: Do not be misled by the title of his book. He does not believe the discredited argument once made in defense of administration economic policy by then-Secretary of the Treasury Donald Regan that deficits don’t matter.

Quite the contrary. Eisner starts from the premise that deficits can matter very much indeed. They can be too large or even too small, and their effects can be good or bad. His argument is that we will never know what these effects are, nor what policies to use, until the deficit is measured correctly. This is where he begins.


There are two main measurement problems: inflation and accounting. Inflation reduces the value of money and thus reduces the value of accumulated debt. The debt, therefore, is overstated during periods of high inflation. The federal accounting system fails to distinguish between current and capital expenditures the way corporations and state budgets do. Since much of the deficit was used to buy tangible assets, the size of the current deficit is overstated.

These points seem simple enough, but according to Eisner, failure to understand them leads to serious policy errors. This is the major point of this book.

The Carter Administration overstated the debt and adopted misguided policies. It tightened fiscal policy, encouraged tight money and weakened a sluggish economy.

For similar reasons, the Reagan Administration continued the Carter policies and brought on the worst recession since the Great Depression of the 1930s.


Failure to understand the deficit led to the passage of the Gramm-Rudman legislation. If its deficit targets are met using wrong measurement methods, the nation is headed for serious economic recession in the years ahead.

Eisner is a Keynesian who believes that a careful analysis of the nation’s recent economic experience rebuts the arguments of supply-siders and monetarists and shows that demand management works. He is disarmingly candid about his intentions. In his preface, he says that these pages “will give comfort to those who, if only in the closet, have continued to identify themselves with established formulations. They should give pause to those who have marched to new drummers.”

With new drummer David Stockman actively recanting, Eisner’s book is well-timed and persuasive in his analysis of the current recovery. A federal deficit is someone else’s surplus, and the more wealth people have, the more they will spend.

The supply-siders were right to push tax reductions in 1982 and 1983. These tax reductions propelled the recovery but not for “supply-side” reasons. The economy reacted to classical demand-side stimuli.


The radical tax overhaul bill now before the U.S. Senate also aims at stimulating demand. This “supply-side” measure does no violence to the memory of Keynes. The nation seems to prefer its Keynes with supply-side language.