Why Balancing the Budget is a Stupid Idea

When Bill Clinton was in the White House and the Republicans ran Congress, it was Republicans who demanded that the federal budget be balanced. That was because they wanted to cut federal spending. Now that George Bush is in the White House and Democrats run Congress, it’s Democrats who are outraged by what they consider to be an irresponsibly rosy scenario in the President’s new budget, which he claims will be balanced by 2012. Impossible, say the Democrats, who want to roll back his tax cuts on the wealthy.

Let’s call a time-out here and ask ourselves why it’s so important to balance the federal budget in the first place. The federal budget is just an accounting convention – and a lousy one at that. It doesn’t distinguish between three types of spending: (1) spending that's necessary to pay off obligations made in the past, (2) spending intended to make us better off today, and (3) spending to make us more productive in the future.

Any family knows the difference between past, present, and future – between, say, paying down the mortgage, going on an ocean cruise, or paying college tuition for the kids. You’ve got to honor past obligations, because your credit-worthiness depends on it. If you don’t make those mortgage payments the bank could foreclose on your house. Meanwhile, you’ve got to live today on the basis of what you can afford to do today. That ocean cruise may be tempting but if you haven’t saved enough for, forget it. It’s an extravagance. And you should make investments in the future. Even if you have to borrow to send the kids to college you should do so because that’s a smart investment. And smart investments will help your family live better in the future and pay off its loans more easily.

But the federal budget doesn’t at all resemble a family budget. The federal budget is a static account that tells us nothing about past, present, or future. Price supports designed to protect today’s farmers are treated the same way as education and health care for our nation’s children. They both show up as categories in the yearly budget – even though the farm price supports are to keep a group of people secure today, while education and child health care are really investments in America’s future. Social Security surpluses show up in the budget as this year’s revenues that offset this year’s expenses. But in reality the surpluses are payments by post-war boomers who are still working – but who in a few years will be retired and making big withdrawals. What look like revenues will soon turn into big liabilities. The federal budget hides this inconvenient fact.

No one in their right mind should worry about balancing this silly agglomeration. Hats off to politicians (like John Edwards) who recognize this. We should worry instead about putting aside enough to deal with past obligations, devoting no more than we can now afford to current needs, and making adequate future investments – even if we have to borrow in order to make them.