Defining "Balanced Budget" Down
Bush administration fiscal policy is way out of balance in the long run, and this is a very serious problem: if the government doesn’t balance its budget (in the sense of keeping real debt growing no faster than real GDP), then the market will balance the budget for it in ways that nobody will like.
Did you catch that? Apparently a “balanced budget” no longer means government receipts equaling government outlays (i.e., no new debt). Now a permanent, perpetual, structural deficit is really a “balanced budget.” Go figure.
In fact, not only can there be a budget deficit and still have a “balanced budget,” but the deficit can actually grow, by the rate of inflation, and they’re still allowed to call it a “balanced budget.” Go figure.
But wait, there’s more! Not only can there can there be a budget deficit, and not only can it grow by the rate of inflation, but it can even grow by the rate of inflation and the rate of GDP growth. And still they can call it a “balanced budget.” Go figure.
Actually, it’s all that “go figuring” that’s the problem.
No one seemed to like those kind of shenanigans when politicians and economists played games with the “natural rate of unemployment.” Should it be 3%? 4%? 5%? Heck, use whatever makes us feel good and gets us through today’s news cycle.
I try not to take sides between conservative and liberal economists. They’re all full of it. I’m old enough to have gone from the tax-and-spend Democrats to the tax-and-spend Republicans. It’s clear to me now that whichever party happens to be in power will sell its economic soul to stay in power. So be it.
Anyway, I certainly accept the idea of measuring deficits and debt as a percentage of GDP (though I renounce adjusting figures for inflation — with a handful of exceptions, life is not “adjusted for inflation,” just like life is not “seasonally adjusted”). I’m also old enough to remember the “Does the debt matter?” academic literature of 20 years ago — it was all the rage when I was an economics graduate student.
But there’s no fighting arithmetic: a budget deficit is a budget deficit and by definition is not a “balanced budget” or any other kind of equilibrium.
Sometimes economists are so smart that they’re downright dumb. They built up this whole literature trying to model whether a national debt matters to an economy, but forgot the first rule of elementary economics: a national debt must matter, if for other reason than because of opportunity cost.
If a government has a national debt, then by definition it has an interest burden to service that debt. That interest is an actual cash outlay, the same as judge’s salaries, Social Security checks or fuel for Air Force One. If, all else equal, the government’s debt didn’t exist, then the government’s interest expense wouldn’t exist either. So the government could spend that money on other things or — gasp! — lower taxes.
So even a flat national debt is costly (i.e. bad). A national debt that grows by the rate of inflation is worse. A national debt that grows by the rate of inflation and the rate of GDP growth is worse still. And it is certainly not a “balanced budget” or any other kind of equilibrium.
I do agree with DeLong about one thing though: the market will eventually balance the budget “in ways that nobody will like.”
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