Evening star., 1963-02-13
DEFICITS
Continued From Page Al

The debt is expected to total
1903 billion at the end Of fis-
cal 1868 next June, and S3l6
billion a year later.
In recent years the idea that
Federal budgets should be bal
anced every year gradually has
given way to the still contro-
versial theory that budgets
should be balanced over the
years of the business cycle.
That is, deficits are all right
in years OF recession so long
as the Government achieves
offsetting surpluses in years Of
rising business activity.
President Kennedy indorsed
this theory In his first official
statement of budget policy in
March, 1861. He said then that
the budget, apart from threats
to national security, should "be
in balance over the years of
the business cycle running a
deficit in years of recession
-. and running a surplus in
years of prosperity. ="
Theory Hasn't Worked
But this theory OF achieving
a net balance or surplus over
the cycle has not worked out
in practice. When the economy
is prosperous and produces In
creased tax revenues, the Gov
ernment spends most Of the In
crease or turns 1t back to the
public through tax cuts instead
of using 1t to pay off debts
incurred during receSsions.
Now, even before winning
anything approaching univer-
sal acceptance Of the cyclical
balance theory, most modern
economists have stretched the
rationale for deficits still
further - and the administra-
ton has followed their lead.
BY most ydrdsticks, economic
activity is rising. There is no
recession. Therefore, the cycli-
cal balance theory clearly pre-
scribes budget surpluses, not
deficits.
Nevertheless, the administra-
tion maintains that big defi-
cits, enlarged by tax cuts, are
healthy and prudent in the
present situation. For the first
time, a President is proposing
tax cuts in a period charac-
terized by both prosperity and
budget deficits. o.
Briefly, Mr.. Kennedy's posi-
ton is that the economy is not
prosperous enough, that there
is gap of about $35 billion
between the Nations actual pro-
duction and its potential. This
gap is reflected by high un-
employment and idle machines.
"In Between" Phase
Therefore the United States
now is said to be in an "in-
between" phase Of the busi-
ness cycle. The administration
contends that this situation
calls for approximately the
same kind of "expansionary"
medicine meaning budget
deficits - as the Government
would use in a year of recess
sion. /
Basic to this idea is al
theoretical calculation of the
budgets full employment sur
plus" Taking the current level
of Federal spending and the
pattern of tax rates, economists
figure out how big the surplus
would be If there were relatively
full employment of labor and
other resources.
An unemployment rate Of 4
per cent, compared with the
January rate of 5.8 per cent of
the labor force, is taken as full
employment. At 4 per cent un-
employment, the theoreticians
calculate. the budget would
have yielded a surplus Of about
$l2 billion in fiscal 1861. So
billion in 1862 and So billion
in the current fiscal year.
These surpluses have not
materialized because unemploy-
ment has been above 4 per cent
and the economy has operated
far below capacity. Below-par
economic activity holds down
individual incomes and busi-
ness profits, so tax revenues
are curtailed.
Drains Economy
The administration contends
that these surpluses ever
though they are only theo-
retical are too large and
prevent the economy from oper-
ating at high enough rate To
produce actual surpluses. Large
theoretical surpluses purport-
edly show that the Govern
ment drains too much money
out of the economy In relation
TO the money pumped back In
through Federal expenditures.
What happens, according to
this analysis, is that the econ
omy starts pulling out Of re-
cessions pretty well. But as the
recovery proceeds. the tax sys-
TEN automatically takes away
big shares OF the growing in
dividual incomes and business
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