THE NATIONAL DEBT by Lawrence Malkin may be the most entertaining, best written, scariest and most misleading book on the economy since Paul Erdman's The Crash of '79. It plays to the same audience, the intelligent laymen who learn their economics on the financial pages and view economists as psychiatrists -- that is, as socially expensive handholders, with no fundamental insight. The National Debt will reinforce most, if not all, of their current prejudices about the state of the economy. Malkin paints a picture of an economy drowning in debt, an America heading towards Third World status, a world on the brink of financial panic, and the second Great Depression just around the corner. The hyperbole is exquisite. Some examples are: "a National Debt of crippling dimensions," "envision our country shredding at the edges like a third world nation," or "the capitalist world's largest economy is totally dependent on foreign borrowing to prevent its economy from tipping into recession."

The first half of the book scares the reader to death about the debt. The second half tells him that, the debt aside, the nation is becoming a "Two Tier Society" in which machines are getting all the the good jobs, while most of the rest of us can look forward to "hamburger" jobs. If these two themes seem a bit incongruous, they are. But Malkin is such an excellent writer, so full of Wall Street and Washington vignettes, quotes from great literary and financial figures and fascinating historical references that you quickly stop caring exactly what it is he's saying -- it's just fun reading.

But the book is not meant to be just fun. It's purpose, expressed in the third sentence, is "to explain" the national debt. Unfortunately, there is very little real explaining. There are a lot of numbers, though. We learn that the national debt, when measured by the height of an equivalent stack of dollars, is 134 miles high, that America is now $107 billion "in hock" to the rest of the world and that consumer debt has tripled in 10 years. I guess Malkin thinks these and other numbers speak for themselves. In this regard he certainly is in the company of most other economic writers, politicians and even economists. But he's not in my company. I'm one economist, perhaps the only one, who thinks that the national debt numbers, far from speaking for themselves, provide little, if any, revelations into the correct stance of fiscal policy. I should preface the explaining of this statement by pointing out that I'm a rather level-headed, neoclassical economist, who is embarrassed by wacky supply side economists and distrustful of Keynesians.

The point I want to make about the deficit numbers, a point that Malkin ignores entirely, is a simple point of logic that doesn't rest on any model of the economy. You may think you've heard this point before, but you haven't, so listen up. The point is that the official national debt is an accounting, rather than an economic, concept. When the government takes in money from the private sector, it makes an accounting, not an economic, choice, of whether to label those receipts "taxes" or "borrowing." When it pays money out to the private sector, the government makes an accounting, not an economic, choice whether to label those payments "transfers" or "repayment of principal plus interest."

The government's accounting of Social Security receipts and payments is a good example. When workers pay money to Social Security, the payments are called "taxes"; when they get money back in old age in return for those "taxes," the payments are called "government spending on transfer payments." Suppose the government, starting at the inception of Social Security, had labeled its receipts from workers as "borrowing" (giving them a piece of paper called a Social Security Bond in the process) and labeled the payment of old age benefits as "repayment of principal plus interest." As I once showed, using the 1982 Economic Report of the President, this alternative choice of accounting labels would have meant an official national debt about five times larger than currently reported; it also would have meant federal deficits in most of the 1970s of more than $300 billion annually. If we had used this alternative accounting in recording Social Security receipts and payments, the Reagan deficits would look puny in comparison with those of the 1970s.

The labeling of Social Security is not a unique example of arbitrary accounting choices, leading to arbitrarily large deficits or surpluses. Quite the contrary. Every dollar the government takes in or pays out is arbitrarily labeled. As a consequence, the government deficits, over which Malkin is tearing your hair, are entirely arbitrary measures of fiscal policy and intergenerational burdens. If the Reagan administration were clever, it would change the labeling of Social Security or other receipts and payments. For example, it could simply relabel this year's "borrowing" as "taxes" and provide future "transfers" to the erstwhile "lenders" equal to principal plus interest on the "borrowing." This change in accounting would have no real economic effects since "lenders" to the government only care that they get their money back in the future with interest, they don't care what it's called. Alternatively, the Reagan administration could levy additional "taxes" this year to cover the "deficit" and simultaneously promise future "transfers" to the "taxpayers" equal to the "taxes" plus interest. Such a policy would eliminate this year's deficit, while leaving the public's present value of net payments to the government unchanged as well as their economic position.

IF YOU'RE still with me you might be saying "well even if the government could play labeling games to hide its debt, it doesn't, so why worry." My response is, how do you know? If the labeling of receipts and payments is arbitrary, then the receipts that are currently labeled "taxes" may really be "borrowing" and the receipts currently labeled "borrowing" may really be "taxes." By now, you are probably either confused or annoyed and want to know what the government should be measuring, if not "debt." What it should measure is the net present value of each population cohort's expected lifetime payments (regardless of their labels) to the government. Such a set of generation-specific numbers would provide a label-free measure of the stance of fiscal policy and the burden on alternative generations of financing government consumption.

Had Malkin considered such a measure he might have realized that many elements of the Reagan policy represent hidden "surplus" policies that simply don't show up in the official debt numbers because of the arbitrary choice of accounting. By "surplus policies" I mean policies that make current generations worse off and future generations better off. One tremendously important example is the 1983 Social Security Reform legislation that took away more from the baby boomers in present value than they have gotten or can expect to get from the Reagan "tax" cuts. A second very important example is the 1981 change in the tax structure toward an indirect consumption tax as opposed to an income tax. This change shifted the tax burden onto current older generations. Using generational accounts to exhibit fiscal policy would also have showed that much of the Reagan administration's "spending" on the military has been investment, rather than current consumption. Generational accounts would also provide all the corrections for inflation and government assets that Robert Eisner and others have espoused.

A comparison of generational accounts in the 1970s with those in the 1980s would show that the nation has shifted to a fiscally tight, rather than a fiscally loose policy. This is not an apology for the Reagan policy. Indeed, the Reagan administration and Paul Volker are guilty of fundamentally misreading their own fiscal policy and scaring the economy into a major recession.

Malkin would no doubt dismiss all this as the mutterings of yet another wacky economist. But it's not. Before we let a journalist, no matter how articulate, teach us incorrect fiscal history and scare us into another recession, we should wait for a book that really explains, rather than reinforces, our deficit delusions. :: Laurence J. Kotlikoff is chairman of the Department of Economics at Boston University.