The Myth of a Balanced Federal Budget

Tom Bailey's Income before taxes in 1955 was $7500 per year. Only recently married, he owed $10,000 on his house, $1500 on his automobile and had other debts---for furniture, home appliances and so on---totaling more than $3000. Yet no one---least of all Tom Bailey and his wife---considered him insolvent.

Today Tom's income has risen to $28,000 annually. He and his wife now have three children---and, as could be expected, a much larger and finer house, two cars and a great many additional luxuries. They also have a much larger over-all indebtedness. The unpaid balance on their new-home mortgage alone is more than $25,000---and there are sizable amounts due on the automobiles, the swimming pool in the back yard and their cozy summer place at the lake. Yet, there are none---not even among Tom's creditors---who consider him a potential bankrupt because he hasn't paid cash for everything he's purchased and is deeply in debt. As a matter of fact, everyone who knows the Baileys and their financial situation considers them to be an entirely average family with what, under today's conditions, is an entirely normal financial balance sheet.

All of this would have little or no bearing on the subject at hand were it not that Tom Bailey is very active in community affairs and harbors hopes of someday running for public office. Personable, self-possessed and well spoken, he is frequently asked to address meetings of service clubs and businessmen's organizations in his suburban community.

Tom seldom fails to receive a rousing ovation after making one of his speeches---particularly one that deals with his favorite topic, the urgent need for balancing the Federal budget.

"Years of Government deficit spending have saddled not only those of us gathered here but our children and even generations yet unborn with a staggering debt," he declaims. "The trend must be stopped and reversed---immediately---if we are to have a healthy economy!"

It should be added that Bailey is an executive in a large corporation. Although he is a sales executive and thus not directly concerned with the company's finances, he conscientiously reads all the company's periodic financial reports. He is entirely aware that the corporation has large debenture issues outstanding and that it frequently borrows considerable sums for varying periods from banks and other lending institutions. But Tom isn't in the least worried. He sees, with great satisfaction, that the company's assets and liabilities balance out neatly, that there are ample reserves for contingencies; (continued on page 100)Balanced Budget(continued from page 97) in short, he is sure that everything is in good order. He is certain of the company's future and its ability to meet all its obligations.

"Damn it! There's no reason on earth why the Federal Government can't be run the same way!" he snorts, after studying one of his company's financial statements. "If private enterprise is able to keep its budget balanced, those people in Washington should be able to do it, too!"

How many Tom Baileys do you know?

I have met hundreds of them. Oddly enough, in many cases they are accountants and "financial experts"---the very men one would least expect to overlook the forest of obvious facts for the trees of baseless theory. They all ignore the same basic truth---that any attempt to compare the Federal balance sheet to the balance sheet of a private individual or a corporation is akin to trying to compare an apple to an elephant.

The national debt---a red-ink bogey of approximately 361 billion dollars resulting from years of Federal deficit spending---is strictly a one-sided figure. It reflects only the Government's cash-debt liabilities, while making no allowance for the nation's public-sector assets.

The fallacies inherent in this lopsided system of accounting have been pointed out succinctly and forcefully by Howard J. Samuels, a former oil-company executive and Undersecretary of Commerce.

"The national debt is currently averaging some 360 billion dollars," Samuels observes. "Dividing by a population of about 200,000,000, we get liabilities of something approaching $2000 per person.

"At the same time, as good financial practice would recommend, we must also look at the assets of each American," Samuels continues. "Total assets in the public sector of this economy are somewhere around 2000 billion dollars. To this should be added an estimated 750 billion dollars' worth of skills or human resources. If we then divide our 2750 billion dollars in assets by the population, it turns out that the accumulated wealth of each individual is about $14,000. The differential of about $12,000 may well be considered the true financial position of every living American from the national point of view."

Can anyone imagine a corporation that owes, say, $10,000,000 but that also owns assets worth seven or eight times that amount issuing a financial statement that reflects only its debts? Yet this is precisely what the U. S. Treasury Department does when it issues a report on budget deficits and the national debt.

My remarks should not be construed as a criticism of the Federal accounting system. The Government could hardly list every post-office building and national park---or every acre of Federal property---as an asset. Nor can it show its aircraft carriers, atomic submarines, artillery battalions or guided missiles as capital investments and depreciate them on an annual basis. But then, a dissertation on the peculiarities and paradoxes of Government accounting systems could be continued indefinitely---and it would all lead to the same conclusion: The Federal Government simply is not "in business" in the same sense as General Motors or, for that matter, Joe's Diner. (Of course, there was a time when governments did show profits---when nations were ruled by monarchs whose principal purpose was to enrich their personal treasuries.)

And, conversely, my argument should not be interpreted as a defense of governmental waste. I firmly believe that the Government must exercise every possible economy consistent with its aims, responsibilities and obligations. Such economies make particularly good sense in an inflationary period such as the present. President Nixon's estimated 5.8-billion-dollar surplus for the fiscal year just beginning will be a welcome antidote to spiraling costs, wages and profits---if, at year's end, the surplus actually has been accumulated. But powerful social and economic pressures, wars hot and cold and the problems posed by population explosion, automation and countless other factors make it extremely difficult for even the most conscientiously frugal Administration to balance the budget year after year with the stroke of a Presidential pen.

At first glance, the layman might think it a relatively simple matter to slash sizable sums from an annual Federal budget that ran close to 180 billion dollars in fiscal 1968. It would, on the face of things, seem even simpler if one recalled that only 39 years ago---in 1930---the total of all Federal appropriations was under 3.5 billion dollars, about a 50th of what it is now. (In 1930, the War Department---including both the Army and the Air Corps---had appropriations totaling $465,000,000. Today, with defense appropriations in the neighborhood of 80 billion dollars, the Pentagon allotted close to 7 billion dollars last year just for the purchase and maintenance of land vehicles.)

Statistics are dull. Nonetheless, I feel it necessary to cite some here. According to the United States Treasury Department, the gross national debt in 1950 amounted to approximately 257 billion dollars. By the end of 1968, this figure had risen to 361 billion dollars. This represents an increase of 104 billion dollars, or an annual increase of nearly 6 billion dollars.

So far, so good---or bad---depending on how you wish to look at these basic figures. But what happened to private debt during the same period?

In 1950, private debt in the United States totaled nearly 251 billion dollars, roughly 6 billion dollars less than the gross national debt. By the end of 1968, private debt had soared to nearly 1104 billion dollars; private debt had more than quadrupled, rising at an average yearly rate of about 47 billion dollars. Of the 1950 private-debt figure, 142 billion dollars was represented by corporate debt. In 1968, this corporate-debt figure stood at 586 billion dollars, an increase of 444 billion dollars for the period and, parenthetically, not inconsiderably greater than the gross national debt.

Finally, let us look at the figures for America's Gross National Product. The 1950 G. N. P. was 284.6 billion dollars. Reports for 1968 show that the G. N. P. had nearly trebled in the interim, rocketing to more than 851 billion dollars.

Note that for 1968, the total private debt was more than three times the gross national debt. Note also the corporate debt for that year---225 billion dollars more than the gross national debt.

Obviously, our economy is fueled by credit---which is just another way of saying that it runs on and continues to expand on one form or another of deficit spending. Property of all kinds is purchased, expansion programs are implemented, additional funds are obtained, emergencies are met---all through credit, by confidently banking on the future.

What some people fail to take into consideration is that the Federal Government must also expand---buying more things, financing more projects, obtaining---and providing---more services. Whether one agrees with what the Federal Government does in this, that or another area of its multitudinous activities is not the question. Ours is a democratic form of government. Our leaders are chosen by the majority and, presumably, the laws they pass and the policies they establish are in accord with the will of the majority. If they are not, there are democratic procedures for changing the leadership.

In the past few decades, the Government has assumed---or has been forced to assume---a myriad of tasks and responsibilities. It has moved into areas of activity that were previously matters of concern solely for private enterprise. This has, of course, caused much criticism from certain quarters. Loud, indeed, have been the howls about Government encroachment and creeping---or galloping---socialism.

I do not feel that everything the Government does is always right and good. However, I have lived long enough and am enough of a realist to understand that Government policies have, in general, served to improve living conditions for all, to strengthen the economy and to ensure our security.

Some of the most strident critics of our growing national debt are often the first to grab at Government subsidies or to fight for Government orders. When the Government spends money on anything (concluded on page 211)Balanced Budget(continued from page 100) that is not of direct benefit to these individuals or to their own business interests, they characterize the expenditures as pork-barrel spending and politically inspired waste. But when they or their enterprises stand a chance to benefit financially, they are the first in line, eager to take full advantage of whatever the Government has to offer.

To reiterate: The Federal budget and the national debt are, in a manner of speaking, purely accounting fictions. The former is purely a cash budget, while the latter is a cumulative cash debt. No balance sheet or report concerning either ever reflects the immense assets---tangible and intangible---that the nation possesses to offset its deficits and debts. Suppose the Federal balance sheet reflected the true value of every Government building, of every acre of ground owned by the Government. What would happen if a conservative allowance were made for good will---at home and abroad? How much is the Smithsonian worth, or a Naval shipyard?

A company makes huge capital investments in plants and equipment that are intended to produce goods or provide services on a commercial basis. They are to be sold---presumably at a profit. The Federal Government's capital investments are in national highways, battleships, ICBMs, stockpiles of strategic materials and innumerable similar projects and hardware that do not return a dollars-and-cents profit to the Government. They can and do, however, provide benefits, safety and security to every American citizen, even to those who groan most loudly and most consistently about Federal spending.

I have been a businessman all my adult life. I have a strong and abiding faith in American business and its demonstrated ability to work miracles. Nevertheless, I can hardly imagine any business firm or combination of giant corporations volunteering to undertake the building and maintenance of all the nation's highways. I can't picture any privately owned company establishing and maintaining the nation's Armed Forces, taking them over from the Government and showing a profit at the end of the year.

There are always cries about the continuing deficits shown by the United States Post Office Department. But let a legislator introduce a bill that would raise postal rates and put the Post Office on a self-sufficient basis, and an outcry is raised by all the private enterprises that would suffer from such an increase.

We might as well face the issue squarely. A balanced Government budget is not nearly so important as a safe-and-sound nation. Deficits do not mean disaster for a nation that possesses Gargantuan tangible and intangible resources and assets justifying its deficits and serving as security for its debts.

The Tom Baileys and their companies have faith in themselves, in their ability to retire their debts in the future. They count on continuing growth and expansion of their incomes and profits to create economic strength. But when it comes to the question of Government spending, they cling to the magical myth of the eternally balanced budget as the panacea for all the nation's real and imagined ills.

Is it that they have less faith in their country than they have in themselves?

This is a very good question---one that every American should ask himself the next time he goes into a flap about the bogey of the unbalanced Federal budget. It is a question especially pertinent at the present time, when, despite all the complaints about Federal deficits, the United States is enjoying the greatest prosperity in her history.

Uncle Sam's budget may not be balanced, but the economy of the United States is healthier than it has ever been and shows every sign of growing stronger in the future. This fundamental fact, which should be obvious to all, should also be enough to make a mockery of the myth of a balanced Federal budget.