January 18, 1996
"What if There's No 1996 Federal Budget? Not to Worry"
San Jose Mercury News
By Timothy Taylor
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DEPENDING ON my mood, it's either annoying or farcical to watch Congress and President Clinton struggling to put together a budget for fiscal year 1996, which actually started last October.

The trouble isn't surprising. America voted for President Clinton and then handed him a hot-blooded Republican Congress. As both parties try to carry out their agendas, they will inevitably collide. The lesson, hardly a shocker, is that ambivalent voters who jump between parties can produce a gridlocked government.

From an economic point of view, the budget deadlock isn't especially worrisome. This conclusion seems counterintuitive to some people, but I think that's because at a subconscious level, many Americans believe that the federal government is responsible for running the economy. Of course, conservatives dread the idea, while liberals rather welcome it. But in fact, the notion just isn't true.

Sure, the federal government collects and spends about $1.4 trillion a year, or one-fifth of the nation's gross domestic product. But that means the glass is four-fifths empty: The feds don't collect and spend the rest. Moreover, the budget dispute is only about a portion of federal spending. Neither side wants to amend Social Security. Both sides agree that the government should make its interest payments. Neither side is calling for dramatic changes in defense spending. But those three categories alone are more than 60 percent of federal spending.

This is not to say that the budget dispute doesn't matter. But before believing that a scramble over a minority of the budget will wreck the economy, some perspective is useful.

The U.S. economy has more than 125 million civilian employees. Total real and financial wealth is $20 trillion. It includes 4 million corporations, 1.5 million partnerships, and 15 million proprietorships (not counting the farm sector). These workers and businesses are struggling and striving in a caldron of global competition to produce tens of millions of goods and services.

This web of economic activity has been restructuring and reinventing itself at a wild pace for the last few decades. Huge industries like high technology, automobiles, health care, banking and finance, real estate and others have been shell-shocked several times, and then recovered. The U.S. economy has become more linked with international markets for capital and goods.

This huge network of consumers and businesses, savers and investors, workers and employers, all buying and selling and investing and innovating and making deals with each other, has a momentum and force all its own.

Even if an official budget never arrives in 1996, it seems unlikely to knock the overall economy off kilter. Instead, the government will stumble through the year on some sort of continuing budget resolution, where this year's actual budget ends up looking quite a lot like last year.

There has been concern that uncertainty over a budget deal will hurt the stock market. But a deal has been uncertain since the 1994 elections, and since then, the Dow Jones stock market average has climbed from under 4000 to above 5000.

A worry dear to the heart of economists is that if the government statisticians aren't able to collect statistics like the unemployment and inflation rate, it will disrupt financial markets and the decision-making at the Federal Reserve. Silly as it may sound, my heart does bleed a little when a statistical series is disrupted. But there are dozens of alternative sources of information about the economy, both inside and outside the government. Missing some monthly data won't bring the $7 trillion U.S. economy to its knees.

The one real danger is that the budget standoff might lead the U.S. to default on its interest payments. Global financial markets would exact a heavy toll for such a blunder, by requiring the government to pay higher interest rates for years to come. But the latest word from the Republicans is that they will not stand in the way of raising the debt ceiling so that the interest payments can be made.

Whether one is talking about the federal government, private corporations, or home remodeling, extensive restructuring is always a bad time. But sometimes it's necessary.

Federal debt held by the public has risen from 27 percent of gross domestic product in 1980 to 52 percent this year, and the upward trend is projected to continue into the 21st century. This federal borrowing has siphoned off funds from private investment and turned the United States into the world's largest debtor nation.

It isn't helpful for the economy to have a Congress and president who can't combine to put together a budget, but the economy can soldier on even with the federal budget process in disarray. In the end, what matters is not the political squabbles over the budget, but whether the federal budget is actually restructured so that deficits are brought under control for years to come.

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