Balanced budget's impact: lower interest rates Economists forecast a gradual increase in rate of growth

January 16, 1996|By Carl M. Cannon | Carl M. Cannon,SUN NATIONAL STAFF

WASHINGTON -- It is December in the Year 2001. The White House budget office announces that the federal government will have a deficit for the coming year of zero.

Voila! A balanced budget.

Politically speaking, this is the Holy Grail. The nation hasn't had one in 30 years, and although there were urban riots and a war in Southeast Asia the last time the budget was in balance, the public seemed convinced that it will help bring back simpler days. Over 80 percent of voters yearn for a balanced budget, and it was the Republicans' clarion call in the 1994 elections. Even President Clinton and the Democrats have agreed to produce it in seven years.

So, what would it mean if it actually happened?

Would the budget director be honored in a ticker-tape parade? Will there will a chicken in every pot and two cars in every two-car garage? Will cheerful youngsters shovel snow from their elderly neighbors' walkways? Will all Americans be guaranteed of catching trout on their fly rods -- on the very first cast?

"It will be good, but not that dramatic," says University of Maryland professor Allen Schick, a budget expert. "If you must have a metaphor, it will be like getting rid of termites in the basement.

"Sometimes you only know you have termites when it's too late, when they've already eaten through the wood. When you get rid of them, you've still got work to do -- we'll still have a $5 trillion national debt -- but you'll enjoy the house a little more because you have peace of mind."

One interesting aspect of the budget fight is how much agreement there is among economists on this view. Economists insist that as the government borrows less from the financial markets, which it regularly does to make up the difference

between bills incurred and taxes collected, there would be more money for other things. The initial effect would be on interest rates.

"What is the benefit of a balanced budget?" asks Ray Stone, a New Jersey economic analyst. "It's lower interest rates, and that's it."

But lower interest rates -- Laurence Meyer & Associates, a St. Louis consulting firm, estimates that long-term rates could fall to 5 percent -- could have rippling effects, almost all of them positive. Venture capital, bank loans and start-up money for small businesses would be easier to come by. More start-up businesses would mean more employment. Housing costs would decline as well. This would help housing starts, long a key barometer of a growing economy, while leaving money for such endeavors as savings accounts or college tuition. Car loans would cost less, too -- thus car sales would increase.

These activities are factored into a statistic that economists call the rate of economic growth. An increase in this rate improves the standard of living of the average American over the long run.

William Niskanen, an economic adviser to President Ronald Reagan and now chairman of the conservative Cato Institute, estimates that after 10 years, this rise in growth would be worth about $400 a year to an average family.

"It would be almost imperceptible," says Charles L. Schultze, an economic adviser to President Jimmy Carter, now a fellow at the liberal Brookings Institution. "A balanced budget would fuel a very, very slow and gradual increase in the rate of growth. But over a period of 25 years, it really adds up."

Economists have come a long way from the 1950s and 1960s, when debates raged between "Keynesians" and "neo-classicals" over the merits of a balanced budget.

Devotees of John Maynard Keynes argued that budgets don't need to be balanced and instead should mirror the cycles -- the ups and downs -- of the economy. These economists, considered liberal, thought that government should be free to run deficits in years of recession -- that government spending in times of economic slowdown could prime the economic pump.

The classicals argued that keeping the budget in balance -- and thus out of the way of the financial markets -- was the best thing government could do.

This debate was not so much won by one side or the other as it was made to look quaint by the exploding deficits of recent years.

"The Keynesians, never in their wildest dreams, contended you could run deficits indefinitely -- deficits that got larger and larger over time," observes Mr. Stone. "In fact, under Keynes, you were supposed to run surpluses in the good years."

Well, surpluses have gone the way of the leisure suit. Today, just paying the interest on the national debt costs some $250 billion a year -- nearly as much as the amount for defense spending.

Splurging in the 1980s and the first half of the 1990s, the nation's political leaders treated the citizenry to $5 trillion worth of stuff that nobody wanted to pay for -- at least not any time soon.

Politicians have a bloodless term for this method of accounting: deficit financing. Critics have more colorful terms. "Robbing our children and grandchildren," says former Democratic Sen. Paul E. Tsongas of Massachusetts.

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