What is Fiscal Responsibility? Long-term Deficits, Generational Accounting, and Capital Budgeting

This article assesses three basic approaches to assessing the future effects of the government’s fiscal policies: traditional measures of the deficit, measures associated with Generational Accounting, and measures derived from applying Capital Budgeting to the federal accounts. I conclude that Capital Budgeting is the best of the three approaches and that Generational Accounting is the least helpful. Acknowledging that there might be some value in learning what we can from a variety of approaches to analyzing fiscal policy, I nevertheless conclude that Generational Accounting is actually a misleading or--at best--empty measure of future fiscal developments. The best approach to providing for the future is thus to apply careful cost-benefit analysis through old-fashioned Capital Budgeting to our spending and taxing decisions; but if political pressures prevent the adoption of a federal capital budget, we would be best served by continuing to use our current deficit measures, with some minor adjustments. Because we are attempting to peer into the future, any measure of the effects of fiscal policy will be imperfect. Choosing among those imperfect alternatives is the focus of this essay