The 200 billion dollar question is, What would a balanced federal budget mean -- fiscal sanity or financial calamity?
Republican leaders in Congress, forging ahead with their "Contract with America," have vowed to take the question to the states, three-fourths of which must ratify the measure to emblazon it in the Constitution. Democrats, however, want to know how the GOP intends to balance a trillion-dollar budget without devastating consequences to crucial entitlement programs, like Social Security.
Politics aside, would a balanced budget help or harm the nation's economy?
Paul S. Lande
Senior fellow, Johns Hopkins Institute for Policy Studies
There aren't many people saying a balanced budget, in the long term, is harmful. Interest payments on the debt will eventually consume the entire budget if we don't eventually balance it.
To the individual, what it means is, if we run a deficit perennially, virtually all taxes we pay would go to the debt. So the only way the government could provide services would be to spend more and tax more. Ultimately, the system would collapse.
NTC I think, over the long run, it's beneficial for the budget -- on average -- to be balanced. During a cyclical trough, that is, a recession, it makes sense to have a deficit. During boom periods, it make sense for the budget to be at a surplus.
The advantage of having a balanced budget on average is that it promotes economic stability. We tend to get less dramatic fluctuations in the economic cycle.
Interest rates probably on average would be lower because federal demand for credit would not be as great. That means the private sector would have an easier time financing its projects. Individuals would also.
Taxing more or spending less -- how that shakes out is a political decision. The electorate and our representatives have that trade-off to make. That's going to involve some value judgment. There's no way to say one is unequivocally better.
But on the whole, the economy is healthier by leaving more resources in private hands. If we have this kind of faith in the market system, then we can argue that the overall economy would be better off.
Alfred G. Smith III
Principal economist, NationsBank
It depends on how you get there. Clearly, the transition time is very painful. I think you could minimize the pain by reducing the rate of federal spending to make it fall in line with the revenue stream. It's going to have to be phased in. My approach is, the deficit is not really the problem; it's the increase in federal spending.
The question isn't what's a sacred cow. I think everything has to be looked at. If you balance the budget by cutting spending, you're going to have to get into entitlement programs. Then you get into a value judgment. If you say cavalierly that you're going to cut without regard to those who would get hurt, you're not living in the same world as everyone else.
But it's unrealistic to expect to balance the budget by cutting expenditures alone. I would favor going from an income tax more toward a consumption tax. That would stimulate savings.
To personalize it, the economy would run better. I think the
private sector of the economy would run better at a higher output and per capita income would rise.
David L. Donabedian
Chief economist, Mercantile Bankshares Corp.
There's nothing magic about having a budget that's exactly in balance every year. But having been so out of balance for so long, finally there's a consensus to bring it back into balance.
The benefits are several. First of all, it would provide for a 'N sounder currency. It would provide, over time, less of a need for the government to issue bonds to finance the debt. Once you actually start balancing the budget, you can work down the size of the national debt.
Ultimately, if the government has less of a need to finance an ever-burgeoning debt, there would be less of a need to issue more bonds, there would be less competition for capital and the supply of bonds would be lower. As a result, bonds could be issued at lower interest. That obviously drives mortgage rates and loan rates.
The budget is so big, there are literally hundreds of thousands of choices of what's going to get cut. Clearly, there are going to be some individuals suffering as a result. Part of the plan is to essentially see that everybody shares in the belt-tightening.
People's opinion on this is driven very much by their political or economic philosophy. Sometimes it's the same thing. A lot of this is flying blind. There's a pretty strong feeling in Washington and the electorate that the Great Society didn't work. But we're looking into the future, and it's not as if we know what will work.