Economists weigh the pros and cons

money December 26, 1995
Web posted at: 12:30 p.m. EST

From Correspondent Brooks Jackson

WASHINGTON (CNN) -- Congress and the Clinton administration have shut down the government twice over their disagreements, but they all concur that the federal budget should be balanced -- and balanced no later than seven years from now.

To hear some of their political talk -- from press conferences to television commercials -- balancing the budget could bring back a golden era of low inflation and humming factories, returning the government to a time when Washington actually ran budget surpluses as often as it went into the red, and mortgage rates were 4.5 percent.

But most economists from all sides of the political spectrum say the benefits of a balanced budget won't be that great, or even very noticeable at first.

Herb "It's going to be very slow," said Herb Stein, who was Richard Nixon's chief economist. "It's as if you asked what change will it make if I save $1,000 this year. It won't make much difference in my life. But if I do it every year for 20 years, I will have not $20,000, but $40,000. That will make a difference." (204K AIFF sound or 204K WAV sound)

Agreeing with him is Charles Schultze, who was Jimmy Carter's chief economist.

"Our productivity will grow just a little bit more each year," he said. "We'll have higher incomes and higher wages. Now, for the first four, five, six years you won't even notice it. It'll never be massive, but the next generation may have as much as 1,500 bucks a family extra income, just from balancing the budget."

Modest improvement is the majority view. A minority of economists disagrees.

"They're flat-out wrong," said economist Robert Eisner. "There's really no reason to balance the budget in 2002, or really in any particular year."

construction Government borrowing for roads, airports and education can improve the economy, he said, and a growing economy can afford some government borrowing.

"Despite all the talk, our deficits are very small," Eisner said. "Our deficits are now running about two percent of gross domestic product." That, he said, is less than that of any advanced country in the world except possibly Japan. (128K AIFF sound or 128K WAV sound)

Investment redirected

However, most economists believe government deficits soak up money that might have financed new factories because savers invest more in government securities and less in stocks, corporate bonds, and mortgage funds. Home mortgages become more expensive as government borrowing bids up interest rates. That means higher rates for student loans and car loans or leases.

End government borrowing and the country's savings gets invested in the private sector, most economists contend.

"It's going to go all kinds of places," Schultze said. "It'll go into housing, but it'll (also) go into factories producing everything from bread to cufflinks to computers (and) steel. It should be modestly everywhere."

So balancing the federal budget, while proving a giant leap for Washington's politicians, would probably be a modest, though positive step for future jobs and income.

Balanced budget

Economists weigh the pros and cons

Investment redirected

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