Saturday, July 23, 2005

The Balanced Budget

The Skeptical Optimist wants to redefine the definition of a "balanced budget" to include economic growth.
The financial benefits of economic growth will exactly offset the financial costs of debt growth, if both the economy and the debt are growing at exactly the same rate. Robert Eisner, in fact, suggested defining a "balanced budget" as the level of deficit spending which would result in no increase and no decrease in the ratio of debt-to-GDP.
This is definitely a better definition of a "balanced budget" than the current definition. The problem is that this definition would keep debt/GDP at current levels rather than trying to find the optimal levels of taxes, deficits, and spending. My best definition of a balanced budget would be a budget that is "balanced" such that the marginal cost of borrowing equals the marginal cost of taxes which equals the marginal benefit of spending. This would be difficult in practice since the cost-benefit analysis to find this triple-point would be non-trivial.

Also today The Skeptical Optimist looks at the definition of the Social Security lockbox. He compares two options:

1: Leave the dollars in the Trust Fund; lock them up and don't let anybody touch them, because in the future they will be spent on SS beneficiaries.

2: Use those dollars to buy intragovernmental bonds; convert them back to dollars in the future, to be spent on SS beneficiaries.

Option 2, the current policy, earns interest while option 1 does not. But he notes that the nature of intergovernmental bonds means that "In truth, both options are identical in their effects on total federal government finances." So he asks lockbox advocates "Why don't you want the SS Trust Fund to earn interest?" I will answer for them without squirming: because We want to reduce spending on Social Security. We would rather have the money go to general budget spending or not taken and spent at all. It is not the government's top priority to spend money writing wage-inflated benefit checks to people who don't them. We should use progressive indexing or other cuts to reduce spending even if Social Security is expected to be solvent. The reality is that we have a unified federal budget and Social Security needs to be compared directly to other government expenditures and not be kept separate. I would recommend option 3: "blow up the lock box!"

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