Off balance

March 22, 1994|By Robert Eisner

LIKE a villain in a bad horror movie, the balanced budget amendment pops back to life every time it is killed.

The proposal was defeated by only 12 votes in the House on Thursday -- just weeks after it was rejected by the Senate -- encouraging its supporters to gear up for another try next year.

The amendment is bad economics, but it will keep coming back until we debunk the economic myths perpetuated by the debate.

Foremost, we need to understand what the national debt is and is not. It is not something we owe to other countries; it is a debt of the government to its own people.

Abraham Lincoln had it right in his 1864 annual message to Congress: "Held as it is for the most part by our own people, it has become a substantial branch of national, though private, property. . . .Men can readily perceive that they cannot be much oppressed by a debt which they owe to themselves."

Government debt is, in effect, the exact opposite of private debt: The greater a person's debt, given his assets, the less his net worth; the greater the government's debt, the greater the people's net worth.

The national debt is not the $4.4 trillion figure so often cited, but is really what the government calls the "gross federal debt held by the public," some $3.3 trillion.

(This properly excludes over a trillion dollars of accounting entries that the Treasury Department makes for accumulated surpluses in Social Security and other government trust funds.)

Less than 20 percent of the debt is owed to foreigners, and that percentage has been declining; it was over 21 percent before the big deficit years of the 1980s.

Since the debt is overwhelmingly owed to Americans -- as individuals or through pension funds, businesses, banks, insurance companies and state and local governments -- it does not represent borrowing from the future or a burden on our children.

The debt or liabilities of the government are the assets of the American people, assets that will be bequeathed to our children.

The balanced budget amendment's chief sponsor, Sen. Paul Simon of Illinois, makes little sense when he argues that instead of having "invested in its future, we are the first generation . . . .to borrow from its future."

We might just as well say that the government has given the American people $2.4 trillion of interest-earning assets to bolster their purchasing power and that of their children.

There is also no sense to the repeated assertion that we are "at the brink of bankruptcy."

No sovereign government can be bankrupt as a result of debt in its own currency. The government's debt consists of paper -- savings bonds and Treasury bills, notes and bonds, promising to pay in dollars.

The government can always get dollars, printing them if necessary -- and that is far from necessary now nor will it be in the foreseeable future. The only way it could be forced to default on its obligations would be through an amendment prohibiting it from making additional outlays or borrowing.

The real issues lie elsewhere, and they stem from the fact that the government's debt is the liquid assets of the American people.

The greater these private assets are, the wealthier Americans will perceive themselves to be, and the more likely they will be to spend. Greater spending means increases in sales, profits, orders for production and hiring of workers.

It is true that if an economy is booming and employment is relatively full, with no more resources available to increase production, higher spending will result in inflation. If this happens, the Federal Reserve would raise interest rates to fight inflation, thereby reducing investment.

But now, with unemployment still close to 7 percent and indications that our brisk recent growth may be slowing, is no time to reduce spending. More spending, not less, will increase investment and consumption as business expands to meet growing demand.

Senator Simon is correct in saying that we are not taking care of ourselves and our future. Crime ravages our cities. Tens of millions of Americans are without health insurance. The environment is deteriorating. Much of a generation is growing up functionally illiterate. We are putting a grave burden on the next generation.

But a balanced budget amendment will do nothing to eliminate these real deficits.

Robert Eisner is author of the forthcoming "The Misunderstood Economy: What Counts and How to Count It."

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