Contact: June Gates, 216/579-2048

All Balanced-Budget Plans Are Not Created Equal

The continuing inability of Congress and the Administration to finalize the 1996 federal budget -- despite general agreement on a seven-year horizon for eliminating deficits entirely -- has caused some critics to characterize the impasse as cynical political posturing. However, an economist at the Federal Reserve Bank of Cleveland argues that a broad agreement on a balanced budget goal does not mean that Congress and the President are now haggling over trivial details.

Writing in the Bank's Economic Commentary, Vice President and Economist David Altig says that the debate stems from serious, reasoned differences of opinion on the parts of fiscal policy that really matter: Not so much how large the deficit is, but rather what we spend and how we spend it, what we tax and how we tax it.

To give one example, Altig cites the fact that the Clinton budget would reduce welfare spending by $43 billion over the next seven years, while the House plan would lower it by $60 billion. He argues that the difference between the two welfare proposals goes far beyond the $17 billion spending gap that separates them. Congress, unlike the President, would end welfare as an entitlement, which, although having no necessary impact on the deficit, could have an enormous impact on the future liabilities of the system.

In short, the author claims that fiscal policy options must be judged against a number of important considerations that may have little or no relationship to measuring deficits. For example, how will different government spending choices affect future generations of Americans? How do the Clinton and Congressional proposals differ in terms of the economic activities they favor or disfavor? In the end, Altig explains, policies must be measured by the incentives and disincentives they present for wealth creation.

Altig concludes that the current budget stalemate should not be viewed as irresponsible political posturing; but as part of an honest examination of the long-term consequences of fiscal policy choices.

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