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Toward a Truer Picture of the Deficit

DEMOCRAT Paul Tsongas and Republican Warren Rudman are to be congratulated for launching the Concord Coalition to focus attention on cutting the federal budget deficit. This monster is calculated at almost $400 billion by current accounting practices that underlie our gross national product (GNP) and gross domestic product (GDP) indicators.

But Mr. Tsongas, Mr. Rudman, and their allies - Ross Perot and former Commerce Secretary Peter Peterson - should take time to re-examine these GNP-GDP national accounting practices. Otherwise, they may call for too deep a deficit cut. This could plunge the country into a depression.

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The crucial errors in GNP and GDP accounting, which tend to overstate the deficit, are the omission of our "capital assets" - the country's valuable infrastructure (roads, bridges, dams, public building, etc.). Accounting for such capital assets is normal practice for corporations. Firms routinely carry plant and equipment, land, "human" capital, patents, and intellectual property as assets on their books in order to realistically evaluate their net worth. The Economist magazine, among others, has called

for similar government accounting for public assets and liabilities.

As most economists will admit after they warm to the subject, GNP and GDP accounts ignore infrastructure and other national assets. Why haven't they blown the whistle publicly on these anomalies? Mostly because of peer pressure, and to shield the economics profession from embarrassment.

A long-overdue modernizing of GNP and GDP accounts and other statistics would allow a more accurate measure of the size of the deficit, as well as evaluating America's true "net worth."

This should not deter us from cutting the deficit, because we must bring our government spending back in line with our revenues. But we must also be able to distinguish spending from investments. And when we add in the liabilities incurred by under-educating American workers, polluting our environment, and over-exploiting our natural resources, the remediation costs will tend to swell the deficit.

Tsongas, Rudman, and Perot should look before they leap. They should advocate an accurate re-analysis of the deficit prior to taking too large an axe to it. The cuts they envision - means-testing Medicare, wringing $200 billion in administrative waste from our health-care system, and taxing Social Security checks of affluent recipients - are sound ideas for debate.

Curiously, even Tsongas, Rudman, and Perot, as well as most incumbent politicians and candidates, still discount voters' willingness to bite the bullet on these issues. Although Tsongas and Perot have tapped much of the anguish Americans feel over the deficit, they still need to unravel the different strands of concern, so as to avoid simplistic, across-the-board deficit cutting. For example, bond-holders, lenders, and investors want smaller deficits in order to hold inflation in check; employees (that's

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most of us) want to see an emerging economy with plentiful high-wage jobs, re-training opportunities, and public investment in 21st-century infrastructure; our younger voters and worried parents want to ensure that current consumption habits pay for themselves with taxes.

The Concord Coalition leaders may be surprised to discover that a majority of Americans are already with them. The voters may well understand this better than Tsongas, Rudman, and all three presidential candidates. The Americans Talk Issues Foundation will soon release a survey based on the 1991 federal budget. The American public, both Republicans and Democrats (in a random telephone poll of 1,000 adults), suggested ways of cutting more from the deficit, raising more in new revenues (mostly from higher user fees, pollution, and excise taxes), and shifting more from the military to the civilian sectors than the Congress (deadlocked by special interests) has achieved in a decade.

So, yes, there is a mandate to cut the deficit and even to raise some taxes. But let's also overhaul GNP and GDP to get the numbers correct first. Then we can clean up America's balance sheet the right way - not make things worse.

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