The Balanced-Budget Debate

In "The World's Economic Outlook" (May, 1932), John Maynard Keynes asserted that widespread reluctance to spend was plunging the world economy into a state of depression--so long as all parties clung tenaciously to hard cash, stagnation would drag on indefinitely. He urged the United States to set a much-needed example to the rest of the world by daring to take the initiative to circulate some of its financial resources.

Thirty-two years later, in a much-improved economic climate, the successful entrepreneur and political advisor J. David Stern argued in "The National Debt and the Peril Point" (January, 1964) that even though placing oneself temporarily into debt for the sake of greater returns later on had at last gained acceptance as an effective business strategy, politicians continued to retain old-fashioned and counterproductive notions about the importance of the government's avoiding debt. Like Keynes, whom he lauded as the "greatest economist of the twentieth century," Stern urged the national government to abandon its hoarding tendencies. Neil Chamberlain's "The Art of Unbalancing the Budget" (January, 1966) heralds the income tax cut of 1965 as the indication of a turning point in economic thinking about federal financing. Government resources, Chamberlain explained, would now be spent deliberately (as Stern had urged) for the sake of fueling the economy with more circulating money: "The unbalanced budget, which had so recently been an object of revulsion, had taken on respectability. Government deficits had ceased to be a sin and had themselves become the mark of a shrewd Administration's prudence."

By the 1980s, however, concern began to surface that the government might have moved too far from its initial reluctance to spend. In "The Battle of the Budget" (March, 1981), W. Bowman Cutter, executive director for budget at the Office of Management and Budget under President Carter, warned that "Federal spending is out of control." Federal deficits were no longer being counterbalanced by a booming economy.

Indeed, William Greider's "The Education of David Stockman" (December, 1981) chronicles the disillusioning experience of David Stockman, Cutter's successor and budget director under Reagan, as Stockman attempts and fails in an ambitious plan to use supply-side economic theory--an enticingly painless economic approach, which relies not on cutbacks and sacrifices but on economic stimulation through increased consumption on the part of the rich--to restore a healthier balance to the federal budget. At one point, Stockman confided to Greider with some dismay his realization that he hadn't "stopped what you would call the excessive growth of the budget...in my judgment, it will take three or four or five years to subdue it. Whether anyone can maintain the political momentum to fight the beast for that long, I don't know."

In the wake of the supply-side consumption spree spurred on by Reaganomics, Peter G. Peterson wrote "The Morning After" (appearing, presciently, in the October, 1987, issue of The Atlantic--just weeks before the stock market crash), a sobering article in which the author explained that just when it should have curbed its spending and directed its resources toward saving and production, the U.S. government had instead borrowed immense sums from foreign creditors for the sole purpose of consumption. Neglecting its role as "an investor, a steward of our collective future," he asserted, government had transformed itself into an immense engine for frittering away financial resources. To avoid the inevitable financial crash toward which the economic policies of the recent past were now directing it, he warned, the government would have to take a number of drastic measures: "First," Peterson argued, "we must tame the federal budget deficit."

Two years later in "Is the Deficit Really so Bad?" (February, 1989) Jonathan Rauch contested this theory that continued budget deficits would lead to inevitable, traumatic financial disaster. He argued that since the government had been operating with major deficits for years to no catastrophic effect, it seemed unlikely that any earth-shattering retribution for such profligacy would in fact result. In the absence of imminent punishment, he explained, each generation must decide for itself, purely as a matter of conscience, whether or not to violate "the long-standing covenant with the future" by running up huge deficits in the present that would have to be paid off by subsequent generations.

If the budget is to be balanced, how is it to be done? For a period in the early 1980s, Congress contemplated a "balanced-budget amendment," according to which government outlays in excess of income would have had to have been approved by three-fifths of both congressional houses. The amendment did not gain passage, but in "Washington: Less Red Ink" February, 1983), the renowned economist Milton Friedman endorsed the proposal, arguing that politicians--who, for fear of losing votes, often have difficulty denying federal subsidies to pressure groups--would now have an official spending-limit to point to as an excuse for refusing funding. James Fallows in "Entitlements" (November, 1982), and, eleven years later, Peter Peterson in "Facing Up" (October, 1993), both argued that entitlements distributed to the middle class account for the largest unnecessary drain on the federal budget. Social Security, Medicare, civil service pensions, and military retirement pay, they explained, dole out significant sums annually to many already financially comfortable. In "Entitlements," Fallows traced the history of such programs, and suggested that well-meaning reforms with unforeseen consequences are what led to the problematic and unsustainable entitlement system in the first place. Both authors argued that the middle-class must learn to sacrifice the government-financed windfalls to which it had become accustomed. Fallows wrote: "Our national accounts will remain out of balance until we wrestle with the IOUs that middle-class America has issued to itself, through Social Security and Medicare." Peterson concurred: "Most Americans--emphatically including the middle class--will have to give something up, at least temporarily, to get back our American Dream."

—Sage Stossel