A Capital Budget?

No large business keeps its books the way the government does. For the government, there's cash in and cash out, and the difference between those two numbers each year is the deficit. Businesses distinguish between current expenses and capital investments, such as machinery, which will last more than a year. On their books, they spread the cost of buying a new machine over the years it will be used. Even profitable businesses often borrow and spend more than they bring in during any given year. In fact, many successful businesses increase their debt year after year. As long as they are using the money to buy productive assets, the company can show a profit, and nobody has a tizzy, as many do about the national debt.

Opponents of a balanced-budget amendment say the same logic ought to apply to the government. It is nonsense, they argue, for the entire cost of--say--an aircraft carrier to be attributed to the years it takes to build, when it will be in service for decades. There is no reason the government shouldn't borrow money for long-term investments, just like a business. Cash in vs. cash out is a meaningless concept, and a constitutional limit based on that concept would be pointlessly restricting.

It's a tempting argument. But there are four catches.

First, the notion of a government "investment" is dangerously flexible. Aircraft carriers are easy. But what about college loans? Aren't they investments in our nation's human infrastructure? Even school lunches could be--and surely would be--called nutritional investments in our children's long-term health. Without undue creativity, the cost of almost everything the government does could be taken off of this year's books and pushed into the future.

Second, you can't just start now. It's very pleasant to push a lot of current expenses into the future. But to do this thing right, you also need to pull a lot of past expenses into the present. (Remember all those aircraft carriers you bought during that drunken spree during the 1980s? Under capital budgeting, you're still paying them off every year.) Whether proper capital budgeting would leave today's deficit larger or smaller is an open question.

Third, a really businesslike budget would also have to account for present commitments to future expenses. When a company incurs an obligation to pay for--say--a shipment of widgets, that IOU goes on its books now, even if the company doesn't have to shell out cash until next year. The government currently takes in hundreds of billions of dollars each year in Social Security, Medicare, and federal pension payments. Each of those dollars represents an obligation to pay out many more dollars when those who are paying in qualify to receive benefits. Properly accounting for these entitlement programs would make the current cash-basis deficit look trivial.

Fourth, when a business borrows for a capital investment, the investment comes with a revenue stream for paying off the debt. That new machine, for example, will produce goods that can be sold. Government capital investments--even unarguably legitimate ones--lack this delightful advantage. A bridge or a highway, for example, may produce a return for society that fully justifies its cost. We would be fools not to build it. But (unless there's a toll) it generates no return for the government. (Well, if the bridge or highway increases general prosperity, it will also increase tax revenues. But few public investments have a total payoff so great that the small fraction of that payoff recaptured in taxes is enough to cover the cost.) Spending money today and accounting for it tomorrow makes sense when that spending will pay for itself tomorrow.

While it's true that ongoing businesses don't especially worry about whether cash in equals cash out in any given year, it's also true that a business cannot spend more than it brings in, year after year, indefinitely, and hope to stay afloat. Bookkeeping is not alchemy. Eventually, you must cover your costs.

--Michael Kinsley