Economics for Today 9th Edition by Irvin Tucker

Exercise 47

HOW REAL IS UNCLE SAM'S DEBT?
Applicable Concepts: national debt and federal deficit
Perhaps the national debt and federal budget deficits are really not so large and threatening. For example, it can be argued that we should use real rather than nominal values to report the national debt-similar to using real GDP to report economic growth. Suppose the national debt rises from $18 trillion to $18.3 trillion and the price level increases by 3 percent in a given year. The nominal value of the national debt therefore has risen by $300 billion because the government must issue $300 billion in newly issued government securities due to higher prices, and real growth in the national debt is therefore zero.
Critics also warn that federal accounting rules are an economic policy disaster. Private businesses, as well as state and local governments, use two budgets. One is the operating budget , which includes salaries, interest payments, and other current expenses. The second type of budget, called a capital budget , includes spending for investment items, such as machines, buildings, and roads. Expenditures on the capital budget yield benefits over time and may be paid for by long-term borrowing. The federal government does not use a capital budget. Capital budgeting allows spreading the cost of long-lasting assets over future years. For example, the federal budget makes no distinction between the rental cost of a federal office building and the cost of constructing a new federal office building to replace rented office space. However, payments on borrowing for a new building provide the benefit of a long-lasting asset that offsets rent payments. If a capital budgeting system were used, the public would see that most federal borrowing really finances assets yielding long-term benefits. In short, proponents of a capital budget believe the public's focus should be on the operating budget, which gives a truer measure of the federal deficit. Opponents of changing the accounting rules argue that controversial expenditures would be placed in the capital budget in order to manipulate the size of the deficit or surplus in the operating budget for political reasons.
Finally, some economists argue for other numerical adjustments that show the federal deficit or surplus is really not as it seems. They say it is not the federal deficit or surplus that really matters, but the combined deficits or surpluses of federal, state, and local governments. When state and local governments run budget surpluses, these surpluses are a source of savings in financial markets that add to federal surpluses or offset federal borrowing to finance its deficit.
Critics of "new accounting" for federal borrowing argue that it does not matter what the government spends the money for. What matters is the total amount that the government spends minus taxes collected. Explain this viewpoint.