Balancing the Federal Budget

A recent article by Sophie Quinton of Stateline.org that was reprinted in the St. Louis Post Dispatch described the many groups around the country that are attempting to arrange for a constitutional convention to amend the federal constitution. One common theme among these groups was the desire for a balanced budget amendment. This has long been a goal for many conservative groups and even for such decidedly non-conservative politicians as the late Senator Paul Simon. Proponents of such an amendment argue that state and local governments are required to have balanced budgets (the performance of the State of Illinois notwithstanding). Furthermore, they contend that businesses and even individuals cannot continue to operate with deficits.

I believe that we have a classic apples and oranges comparison problem here. Those governments, businesses and individuals that operate in a “balanced budget” environment do so by separating capital and operating expenses. It is quite normal to incur debt for the former and very dangerous to do so for the latter. Were such a separation not possible, governments could not build highways, structures, sewer plants, etc. Business could not invest in new plants and equipment. Individuals could not purchase houses and automobiles. Obviously, debt is not the problem.

The federal government operates with what might be called a unified budget. It makes no distinction between capital and operating expenses. If you examine a proposed budget, you will find operating expenses like personnel and utilities lumped in with very expensive buildings and equipment. For example, a very quick pass through the Defense Department portion of the FY18 budget proposed by President Trump identified almost $19 billion of proposed expenditures for such capital items as planes, ships and vehicles. I did not take the time to look for such items as the construction of the GSA building in St. Louis or other obvious capital items. What is more, expenditures on so-called infrastructure items are capital expenditures, and such expenditures are an integral part of both the President’s program and that of the Democratic party. A simple balanced budget amendment would be an unmitigated disaster. The government must be able to borrow in order to meet capital expenditures just as corporations, individuals and lower levels of government do.

The issue is not really the national debt itself but the level of the debt. Good governmental, corporate and individual financial management requires that debt be considered in the context of the ability to repay what is borrowed. That is what credit ratings are all about. Government and corporate “junk bond” ratings make it almost impossible to borrow except at very high rates of interest, and the same is true of individuals with low credit scores. There are some who are satisfied with a simple measurement of federal debt as a percentage of Gross Domestic Product. While that is a useful, simple indicator, it is probably insufficient.

I would feel a great deal more comfortable if our federal budgeting system identified exactly those items for which the government is borrowing money. Can you imagine going into a bank and asking for a loan to purchase some “stuff” without specifying what you want the money for? Admittedly, governments do not face the same collateral requirements that corporations and individuals face, but we should require them all to be equally specific. This is particularly true in those cases in which the government is forced to increase taxes in order to provide a sufficient income stream for debt retirement. It is equally true if the income stream for debt retirement is achieved by cutting spending for other government programs. All such actions should be totally transparent to the taxpayers as well as to legislators. I fear that many of our legislators have no clue as to the specific linkages involved in such budgetary decisions.

In order to achieve the desired transparency, we most separate capital and operating expenses in the federal budget. In that way, we can see which items are eligible for purchase with borrowed money. It should also require the identification of proposed income streams for debt retirement. Now that is “running government like a business.” We should not ban debt and equate it with sin.

It is also worthwhile to point out in this context that some debt is mandatory under current law. One often hears charges the federal government has been “raiding” Social Security funds to pay for its extravagant projects. In fact, the Social Security Administration is required by law to invest the funds collected in government securities. The interest paid on such investments is critical to the growth of these funds. That is the way the system was designed. Unless the government borrows, Social Security funds cannot draw interest. If SS draws no interest, it will become insolvent much earlier than currently predicted.

The old adage is appropriate here. “Be careful what you wish for.” Debt free government sounds wonderful to many. It would, in fact, be terrible.