May 18, 1990
"Playing Fast and Loose with Deficit Definitions"
San Jose Mercury News
By Timothy Taylor
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IT'S not difficult to define the federal budget deficit out of existence. For example, just decide that the entire $300 billion defense budget is a long-term investment in the nation's future and a sacred commitment to our children and our children's children, and thus shouldn't be counted as spending. Presto! Instant budget surplus!

Or Congress could just pass a law declaring that henceforth, the budget deficit will now be called "the ice cream sundae." Presto! No more deficit!

Of course, the nation would develop some serious economic tooth decay from a diet like that, but that's exactly the point. The economic effects of the budget deficit depend on how much money the government has to borrow from domestic and foreign savers in the private sector, not on what the government chooses to define as the deficit.

But the budget summit between President Bush and Congress that started on Tuesday seems to be focusing primarily on questions of definition, with a healthy dose of squabbling over procedure as a side course.

For example, one proposal that appears be getting serious consideration is that since the government will try to recover the costs of the savings and loan bailout by suing various parties, perhaps government spending on the bailout shouldn't be counted toward the deficit. Presto! The 1991 deficit falls by about $40 billion!

I'm all for trying to nail up the hide of every fraudulent S&L operator, but a healthy dose of reality therapy is called for here. The overwhelming majority of the money lost by S&Ls was loaned out in high-risk projects that went bust.

For example, perhaps the money was loaned to drill an oil well where there turned out not to be any oil, or to build an office building where there turned out not to be any commercial tenants, or to help people buy homes where home prices turned out to be falling. In all those cases, the original loan money has been spent and diffused throughout the economy. Neither the S&L owner nor the borrower has it; it is not sitting in some bank account somewhere, waiting to be seized by federal bank regulators.

It's silly to pretend that the government will collect a few hundred billion dollars in fines to repay the S&L bailout. And it's equally silly to say that because some small amount of the bailout money will eventually be recovered, that the money spent now shouldn't count as current government spending.

A second proposal for playing with the deficit numbers is to stop counting the surplus in the Social Security trust fund as part of the deficit. At first glance this might not seem to help, because it would actually make the official deficit $74 billion larger in 1991.

But the larger redefined deficit could turn out to be a congressman's best friend, because it would provide a politically acceptable reason to push back the deadlines of the Gramm-Rudman budget balancing law, which otherwise requires that the deficit be cut to $64 billion in 1991.

There is a popular misconception that the surplus in the Social Security trust fund is camouflaging the "real" size of the deficit, and that the government is "raiding" the trust fund and "stealing" the money to pay for other programs. It's good alarmist rhetoric, but it's wrong.

Under current law, the Social Security trust fund is required to lend any surpluses to the rest of the government, and one good reason for that requirement is that the U.S. government is the safest possible investment. When the trust fund builds up a surplus and loans it at a competitive rate of interest to the rest of the government, the government can borrow less from foreign and domestic savers. A larger surplus in the trust fund does reduce the real deficit.

Tampering with Social Security might be a despicable and inhumane idea, a betrayal of trust, or worse. But whether or not it makes sense to alter Social Security, it makes no sense to pretend that it's not connected to the rest of the federal budget. The proposal to change the bookkeeping by not counting the Social Security surplus in the official deficit does not raise taxes or reduce spending; by definition, it therefore cannot change the real budget deficit.

My hopes for the budget summit called by President Bush are mild, even forlorn. All I want is for the negotiators to do something. But changing the definition of the deficit is not doing anything. Choosing new targets for future deficit reduction is not doing anything. (Although no one seems to remember it, the original Gramm-Rudman bill required a balanced budget by 1991, and look where we are today.) Agreeing on a different budget procedure, even giving Bush a line-item veto, still isn't doing anything.

I don't ask much. I'm willing to call the budget summit a success if out of a $1.2 trillion budget and a $5.2 trillion economy, they can reduce next year's deficit by $40 billion or so. But they have to do it by cutting spending or raising taxes. Everything else is pretense.

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