Public Policy: Which Budget to Balance?

When the Kennedy Administration closes its books for fiscal 1962 two months from now, the recession-ridden federal budget is certain to wind up somewhere on the order of $7 billion in the red. And there is scant relief in sight. Though the President a few months ago talked hopefully of showing a surplus for fiscal 1963 (see chart), most economists last week agreed that a budget deficit of from $2 billion to $5 billion is likely next year, too.

All this leads many businessmen to question the right of the President to accuse steel companies of being inflationary when they seek price increases. The likeliest sources of inflation in the U.S., argue the President’s business critics, are Government spending and the federal budget deficit. Says Walter Maynard, a partner in Wall Street’s Shearson, Hammill & Co.: “Mr. Kennedy’s moral position would be stronger if he operated his Government at a surplus.”

Clearly stung by such criticism, Treasury Secretary Douglas Dillon last week answered back at a meeting of the New York Economic Club. The burden of Dillon’s argument was that the real cause of the prospective budget deficits was not increased Government spending but the disappointing pace of the business recovery—which means that the Government’s tax revenues will not be so large as it had anticipated. Dillon conceded that when a nation’s industrial capacity is running full blast and consumer demand is strong, budget deficits “almost invariably lead to a rise in prices.” But, said he. “I want to point out that the effect of a deficit on a slack economy is totally different from the effect of the same deficit on a full-employment economy.”

Double Reckoning. Some economists argue that the Government could make a better case for itself if it quit trying to defend its fiscal policies on the basis of the “administrative budget”—the accounting method under which the U.S. Government traditionally explains its financial position to Congress and the public. They say that the Government’s real impact on the economy is more accurately revealed by something called the “national income” system of accounting—an alternate method of budget reckoning that the Administration first published as a supplement to the regular budget review last November.

The national income system, its proponents insist, is more comprehensive and more up to date than the administrative budget. It reflects more fully just how much money the Government is pumping in and out of the economy because, unlike the administrative budget, it includes the collections and disbursals of such federal trusts as the social security fund and the unemployment insurance program. More important, the national income method follows standard business accounting practice by listing expenditures at the time bills are incurred rather than when payment is made—and similarly counts taxes as current income at the time when corporations set aside in their own accounts the money to pay their tax bills. By contrast, the administrative budget counts tax money only as it is actually collected every six months, which makes it at best only a retrospective measure of the state of business.

Dressed-Up Record. Under the national income system, the Administration’s fiscal record does not look nearly so bleak —or so inflationary—as it does under the administrative budget. By January of this year, total Government receipts under the national income budget were running at an annual rate of $103.2 billion, and total expenditures at $105.2 billion. Thus, the federal deficit melts to $2 billion under national income accounting, and by the end of fiscal 1962 may be as little as $500 million. Far from showing up the Administration as a profligate, the national income system indicates that during calendar 1961, Government receipts increased by $10.7 billion while spending went up only $7.2 billion.

Bearing out the national income system’s noninflationary message last week was more prosaic evidence detectable in every pocketbook. Though the consumer price index edged up in March to a record 105% of the 1957-59 average, its total increase since March 1961 has amounted to only 1.1%. And since 1960, the value of the dollar has been eroded only 1.8%, v. 3.7% between 1957 and 1959.

Nothing Automatic. In the light of these figures, most economists—and some businessmen—accept Dillon’s thesis that Administration policy is not fostering inflation. Says Vice President Tilford C. Gaines of Chicago’s First National Bank: “There is nothing automatically inflationary if the federal budget is in debt.” But though they see no inflation in prospect, a number of economists point out that deficits in the administrative budget nonetheless have a damaging psychological effect—especially abroad. Says Columbia University’s Professor Raymond J. Saulnier, former chairman of Dwight Eisenhower’s Council of Economic Advisers: “Deficits tend to undermine confidence in the value of the dollar, which can reflect itself in disinvestment in U.S. capital and in a gold outflow.” As if to underscore the point, the Federal Reserve reported that the U.S. last week lost $40 million in gold, reducing the nation’s reserves to $16.5 billion—the lowest level since August 1939.