Balancing Act

The message from the federal government's fiscal stance is muddled right now. What's disturbing is how the government's ledger made a $700 billion swing from a record surplus in 2000 to a current record deficit. What's ambiguous is how worried we should be about the red ink.

The administration's attitude reminds me of Mad magazine's zany hero Alfred E. Newman, "What, Me worry?" That is certainly the impression given by Ron Suskind's new book, The Price of Loyalty, a portrayal of former Treasury Secretary Paul O'Neill's two-year stint with the Bush administration. According to O'Neill, no one in the upper echelon of the administration worries about the fiscal impact of tax cuts. Vice President Dick Cheney is quoted as saying that "Reagan proved that deficits don't matter." The fiscally conservative O'Neill, who fretted about the looming budgetary drain from an aging baby boom generation, was unceremoniously shown the door.

Some observers like New York Times columnist Paul Krugman, believe the administration's fiscal recklessness will end in economic catastrophe, most likely through a collapse in the dollar's value.

Others aren't convinced, and not just supply side zealots that never met a tax cut they didn't like or a budget deficit they feared. Take the perspective of historian John Steele Gordon. He's the author of Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt. As a general rule, Gordon dislikes deficits. But on last week's show he called the deficit as a "blessing," a powerful tool for financing economic and military security.

I'm on the concerned side of the ledger. Still, whether you believe the deficit reflects irresponsible fiscal management or a rational response to crisis, one thing is clear: We need better numbers. The current budget picture is a short-term snapshot that doesn't take into account long-term financial obligations. Many economists and Washington budget experts agree that the federal government's bookkeeping makes Enron's accounting appear a model of clarity.

One suggestion put forward by Gordon is for the federal government to create an independent body modeled along the lines of the Federal Reserve Board. The members would be insulated from politics by enjoying long-term, staggered terms. The staff could be made up of mostly tenured university professor's expert on government finances. The job of the government watchdog would be to keep the books honest as well as easily understandable to the average citizen.

At the same time, it might be a good idea to dust off an old idea: separate capital expenditures from the ordinary budget. It was common practice among national government's in the 19th century. State and local governments still manage their books in this manner. In the 1800s, governments could only issue debt to finance capital items like roads. Future generations benefit from capital expenditures so it only makes sense that they would help pay for it. As for everything else, the ordinary budget had to be paid when the bill came due. John Maynard Keynes remained a fan of the 1800s rule even after the Great Depression. Keynes believed it was good government policy to insist on separating out capital expenditures from the ordinary budget.

Neither of these reforms will be easy to enact. But they might help put the government's finances on better-or at least more understandable-footing.

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