The Budget Needs Discipline, Not Balance : Government: Politicians are resorting to easy symbolism. How can we invest in the future without some debt?

Balancing the federal budget is a terrific symbol of prudence and fiscal discipline. As a single-minded government objective, however, it could have disastrous consequences. Despite all the recent budget discussions in Washington, inadequate attention has been given to these consequences and how they might be avoided.

First, contrary to popular wisdom, a balanced federal budget would not simply force the U.S. government to operate under the same constraints as households and businesses. Rather, it would impose a limitation that individuals and business leaders would consider thoroughly irresponsible. If families budgeted in this manner, they would have to pay cash for automobiles, houses and college educations. If businesses budgeted in this way, they could not borrow money for equipment and expansion.

Managing a budget the way the private sector does would require Washington to distinguish public investments from government operating expenses. This practice, known as capital budgeting, is used by 42 states, most municipalities and many of our international competitors. Capital budgets stress both fiscal restraint and investment; balanced budgets do not.

The U.S. spends a smaller percentage of its national budget on public infrastructure than any other industrial democracy. Our overburdened transportation systems and often dilapidated public facilities are daily reminders of this neglect. No nation can remain prosperous without making investments in its future.

Additionally, while balanced budgets might be appropriate in a healthy economic climate, maintaining budgetary balance in the face of a mounting recession would eliminate one of the nation’s most effective means of stabilizing employment and preventing a full-blown depression. One Treasury Department study concluded that a balanced budget in effect at the peak of the last recession would have raised the unemployment rate from its actual level of 7.7% to nearly 9%. Moreover, according to S. Jay Levy, chairman of the Jerome Levy Economics Institute in New York, business profits would have been cut nearly in half by a balanced budget in 1993, a year in which the U.S. economy was struggling to enter a period of recovery.

Pursuit of a balanced budget must be tempered during periods of high unemployment. Lawmakers should also use budget techniques that let the public know whether particular deficits are due to public investment, economic downturns or sheer overspending. But to move away from the simplistic symbol of annual balance and to consider such sensible approaches seems just too difficult for both political parties.

Finally, despite all the talk of balancing the budget in the interest of the next generation, our economic and social problems go well beyond the budget deficit. The empirical evidence on links between deficit reduction, interest rates and private investment is just too weak to provide much hope that a balanced budget will appreciably enhance economic growth. Indeed, even conservative economists such as Milton Friedman, Harvard’s Robert Barro and Allan Meltzer of the American Enterprise Institute have expressed skepticism about these connections. And the links are even weaker with regard to improvements in wages, long-term employment prospects, income equality and social harmony.

Recent U.S. fiscal policy discussions have become disconnected from some of the nation’s most pressing concerns. As Sen. Bill Bradley (D-N.J.) said when announcing he would not seek reelection, “Neither political party speaks to people where they live their lives.” It’s time to put budget policy back in its proper context, back where it can be considered as one part of an overall national strategy that addresses worker insecurity, wage stagnation and America’s other fundamental economic challenges.

Washington is capable of devising sound and disciplined federal budgets that facilitate public investment and adjust to swings in the business cycle. Its budgets can also be structured to help address the concerns of ordinary citizens. But none of this can be accomplished if its leaders continue to insist on governing by symbolism.