(FORTUNE Magazine) – YOU SAY you've heard enough about the federal budget deficit? You know it will come to roughly $314 billion in fiscal 1992? You know the national debt grew from nearly $1 trillion ten years ago to more than $3 trillion today? You even know that all those little Matthews and Megans who skipped off to preschool this morning will be stuck servicing that debt through the 21st century? You still don't want to hear about it? Join the club. Neither do the people who propose to run the country. Both presidential candidates barely pay lip service to the nation's unbalanced budget. Neither has a believable plan for reducing the deficit. Worse, both are espousing policies that an impartial observer can only conclude will make things worse. Psychologists have a term for such an attitude: They call it ''denial.'' Truth is, the deficit is insidiously easy to ignore and inherently hard to fix. There are so many different ways to measure national income and outgo that a clever polemicist can make the deficit walk, talk, and crawl on its belly like a reptile. Liberal economists make a reasonable-sounding case that the virtues of higher government spending justify the vice of borrowing. Conservative economists argue, just as cogently, that deficit finance is at worst a venial sin but that raising taxes is surely a mortal one. Finally, the boy-who-cried-wolf syndrome has set in. Dire predictions were made in the early 1980s that big deficits would produce a quick economic cataclysm. That hasn't happened. But something bad has happened and is continuing to happen. We know as surely as we can know anything about economics that our reliance on deficit finance -- by keeping real long-term interest rates higher than they would otherwise be and depressing investment -- is making us poorer today and guaranteeing a bleaker future for our children. Knowing that doesn't help us choose among competing government spending programs. But it should remind us why letting spending on those separate programs add up to far more than we are willing to collect in taxes year after year is wrong. America's addiction to debt began much the way alcoholism develops in the moralist's tale: First comes an occasional drink, which can be stimulating -- even healthy. The U.S. started experimenting with planned budget deficits in the 1960s, following the fashionable economic theory of the day that governments could avoid recessions by cutting taxes or boosting spending, and prevent economic booms from becoming inflationary by doing the reverse. It turned out that legislators were eager to follow this prescription only when it called for stimulating the economy, so budget deficits became habitual. Since 1960 the federal government has produced exactly one budget surplus -- $3.2 billion in 1969 -- and even that wasn't anticipated. Still, things didn't get out of control until the 1980s, when the combination of the Reagan Administration's 1981 tax cuts, its military buildup, and the 1981-82 recession sent the deficit into hundred-billion- dollar orbit. It refused to fall even after the economy began the long expansion that continued until 1990, for a very simple reason. From 1982 -- when the deficit was already $127 billion -- to 1992, federal tax revenues have grown 5.8% a year, on average, while spending has risen 6.5%. Although the pressure to spend remained constant, where the money went changed during the decade. Defense, which claimed 26% of federal spending through 1986, has waned to about 22% this year. But rising interest payments on the national debt, up from 11% to 14% of outlays, and soaring Medicare spending, up from 6% to 8.5%, more than filled the gap. Indeed, interest expense alone now claims 42% of the revenue Washington collects from individual taxpayers (see chart, next page). By the late 1980s public finance had reached the ''problem'' phase -- the fiscal equivalent of vodka for breakfast. Harvard economist Benjamin M. Friedman drew just that analogy in his 1988 jeremiad on deficit finance, Day of Reckoning. Its first line read: ''What can you say to a man on a binge who asks why it matters?'' The binge shows no sign of stopping. According to the Congressional Budget Office, whose projections are widely considered good, nonpartisan benchmarks, the deficit will rise next year to $331 billion, fall back to the $250 billion range in the mid-1990s, and then begin rising again, surpassing the $500 billion mark by 2002. Those projections assume we have real GDP growth of about 3% in 1993 and roughly 2% a year afterward, unwind the S&L bailout with no further trouble, but get hit in the latter half of the decade with exploding Medicare and Medicaid outlays as the population ages. Unless something changes, by the time America enters the 21st century, this nonstop borrowing will have ballooned the federal debt to $6.5 trillion, or 66% of GDP (see chart at left). One thing that makes coping with our deficit addiction more difficult is widespread confusion about how to measure it. Traditional budget accounting simply tallies how much more the government spends each year than it collects. But there are a number of valid alternatives. One looks at the deficit net of the Social Security system, which is currently in the black comfortably. Take out the $51 billion surplus that the retirement fund will generate this year, and the deficit rises dramatically. Subtract one-time costs, such as the S&L bailout or the effects of recession, and it appears smaller. Then there's so-called capital budgeting, which distinguishes between public ''investments'' that promise a future return -- among them, R&D spending, bridge building, and worker-training programs -- and outlays that are immediately consumed, such as federal salaries or Medicaid payments. That's a useful distinction, and it also shrinks the deficit. None of these exercises, however, changes the fact that the U.S. government will spend $314 billion more this year than it collects, that it must borrow that money in the capital markets, and that we and our descendants will have to either pay back the principal or pay interest on it. Why is piling up debt of this magnitude an economic crime? Most citizens instinctively grasp the immorality of handing to their kids and grandkids the bill for today's spending spree, but traditional cash-flow accounting has told us little about when and on whom the burden will fall. A significant analytical advance was made recently by Laurence J. Kotlikoff, a Boston University economist. Together with Alan Auerbach of the University of Pennsylvania and Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland, Kotlikoff devised a rigorous new way to measure the long-term effects of fiscal policy, called generational accounting. It recalculates the government's tax and spending policies to reflect all legally required money flows, including, say, future Social Security liabilities, which don't enter into the traditional measures. Kotlikoff then projects annual money flows -- both what's collected and what must be spent -- so that the burden can be measured over the lives of citizens born in any given year. For simplicity's sake, he expresses the lifetime flows as a single, present-value number. The results of generational accounting are unsettling. If you are a 35-year- old male, for instance, Kotlikoff estimates that the present value of the difference between what you'll pay the federal government in taxes over the rest of your lifetime vs. the benefits you will receive is $195,000 in the government's favor. The tab for 30-year-olds is even higher: $201,000. GENERATIONAL accounting also fills in the awfully fine print of the raw deal we are preparing for future generations of Americans. A 65-year-old retiree today will end up paying about a quarter of his lifetime earnings in federal taxes. Today's youngsters can look forward to paying considerably more -- roughly one-third of their lifetime income. But unless the U.S. makes major changes in its tax and spending policies, Kotlikoff's calculations suggest that future generations, those born beginning around now, will face tax rates that claim somewhere between 50% and 60% of their income. Should those future Americans object -- and how could they not? -- the golden years of the baby boom will be dominated by generational conflict and leaner benefits. Says Kotlikoff: ''The American public needs to be told that we are in deep trouble and that we have some strong fiscal medicine to take.'' A less obvious but no less pernicious way the deficit works its evil is through its effect on investment and interest rates. Unless private savings increase, a rise in government borrowing inevitably pushes down private investment or forces it to pay a stiffer price through higher interest rates -- or both. Fear of such ''crowding out'' -- a tenet of economic theory for generations -- explains why, as the deficit explosion of the 1980s got under way, many economists were convinced that a crisis would soon result in rocketing interest rates. But no crunch occurred because waves of foreign capital pounded ashore in the U.S. to fill the domestic investment void. Instead of looking for direct consequences of the budget deficits on U.S. interest rates, economists should have been thinking globally. Says Olivier J. Blanchard, a macroeconomist at the Massachusetts Institute of Technology: ''The right assumption at this stage is that world capital markets are integrated, so that when one country goes berserk on fiscal policy you don't see interest rates in that country go up very much compared with the rest of the world, but you see world rates go up.'' While Blanchard, like most economists, thinks there are several reasons for today's unusually high real interest rates -- long-term rates minus inflation -- the U.S. deficit, he estimates, could be accounting for as much as one percentage point of them. Finally, persistent deficit spending feeds fear of future inflation. Throughout history, governments have resorted to or tolerated inflation to whittle down the real value of their debt. Says Robert E. Lucas Jr., a professor at the University of Chicago and a leading economic theorist: ''I continue to worry about deficits because I think sooner or later they're going to be dealt with by money creation.'' Right now should be a good time to begin repairing the damage that deficit finance has wrought. The lingering recession of 1990-91 has given way to recovery -- albeit a slow recovery. Inflation is the lowest it's been since the 1960s, as are nominal interest rates. No matter who wins the White House, there will be a lot of new faces in Washington next year with no stake in the status quo. Unfortunately, neither candidate is showing much fiscal backbone. President Bush's latest scheme to trim the deficit by capping entitlement spending, freezing other domestic spending, and allowing citizens to earmark part of their taxes for deficit reduction smacks more of campaign rhetoric than serious policy intent. Worse, he undercuts his own program by also vowing to lower taxes across the board and to exempt Social Security from budget cuts. Bill Clinton's proposals -- lower taxes for the middle class and a cornucopia of new spending programs paid for through a ''millionaire surtax,'' better tax enforcement on foreign companies' U.S. operations, and big layoffs of federal employees -- are just as unbelievable. So what on earth can we do to wean the U.S. away from deficit finance? Above all, we need to be realistic. Balancing the budget next year, which would throw us back into recession, is not realistic. What's important is that we change the direction of fiscal policy so that, at the very least, spending starts growing at a lower rate than revenue. That would begin to shrink the national debt's share of our total output, and thus the burden of servicing that debt. A reasonable deficit goal would be to reach zero within five years -- the typical planning horizon for fiscal policy. To do this we have only two weapons: cutting spending and raising taxes. From the standpoint of economic efficiency, lowering spending is clearly preferable. But the bitter ten-year standoff between conservatives who favor small government and liberals who don't has surely taught us that we won't get rid of the deficit by using either option exclusively. Better to grit our teeth then, and use both. As a guide to action, the five-year plan to eliminate the deficit outlined by Ross Perot in his best-seller United We Stand is as good a start as any. Chief among its virtues is the fact that it gores all oxen equally. First, it would require each government agency to eliminate 5% of its most outdated or unnecessary programs, and reduce spending on what's left by 10% across the board. Bitter medicine? Sure, but that kind of arbitrary cutting by the numbers worked for hundreds of U.S. corporations in the 1980s. Why not for government? Military spending, given the sudden, astonishing changes in the balance of power, is a special case. The Bush Administration has already proposed cutting the defense budget by about $44 billion over the next five years. Perot, like Bill Clinton, would trim an additional $40 billion or so. That hardly seems imprudent. America can easily live without such Cold War white elephants as the Seawolf submarine and the B-2 bomber. Serious deficit reduction will also have to feature an assault on health care spending. The CBO projects that Medicare and Medicaid spending will grow at an average 12% annual rate over the next five years. By 1997 they will cost some $350 billion a year -- nearly as much as Social Security. Stiffer Medicare premiums for the nonpoor would help contain the losses, but the experience of the past decade shows that the demand for and cost of medical services are so strong that the only cure is a far broader reform of the U.S. health care system (see ''The Right Cure for Health Care''). FINALLY, any credible plan to rein in government spending must target the other so-called entitlement programs -- including that holiest of sacred cows, Social Security. Entitlement spending, which also includes federal retirement programs, farm price supports, student loans, Medicaid, Medicare, unemployment benefits, and welfare, now accounts for half the budget, up from less than 20% in 1960. Toughest to cut are the big-ticket benefits collected by the middle class. Perot proposes at least making Social Security benefits and federal pensions more fully taxable for pensioners who aren't poor. We'll probably have to go further and actually pare back the generous annual cost-of-living increases these programs offer. On the revenue-raising side, any new taxes should aim to do as little damage as possible to incentives for work, saving, and investment. Probably the most politically feasible option that fits that bill would be to increase gasoline taxes. Perot called for raising taxes 10 cents per gallon each year for the next five years. That would raise $158 billion and still leave Americans paying less than half as much for their gas as the citizens of other major industrial nations. What else? Rather than push up marginal tax rates, which both Perot and the Clinton camp propose, we'd do better to broaden the base of taxable income and keep rates low -- the laudable goals of the 1986 Tax Reform Act. Two possibilities, also in Perot's plan: Whittle down the amount of mortgage debt deductible for tax purposes, and cap the amount of employer-paid health insurance that's exempt from taxes. Long-term, we should at least examine the possibility of a value-added tax or a flat tax, as described in the preceding story.

Moving to a more balanced budget won't necessarily return us to the golden days of economic growth of the 1950s and 1960s, end income inequality, or fuel a new rise in the stock market. But by paying the price of some economic discomfort today, we could avoid the certainty that our offspring -- and today's workers in their retirement -- will face even more pain tomorrow. What makes the budget deficit different from many of America's problems is that we know it is within our power to solve. Can we use government to end poverty, eliminate illegal drugs, or enhance industrial competitiveness? Maybe. Can we make it balance the budget? Absolutely.

BOX: INSIGHTS

-- The Dr. Feelgoods are wrong. America's deficit addiction is raising long- term interest rates, depressing investment, and ensuring a bleaker future for its children. -- The only realistic treatment: Raise taxes on consumption -- with a gas tax for starters -- and lower spending, mainly by chopping defense and middle- class entitlements.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: CONGRESSIONAL BUDGET OFFICE CAPTION: THE DEBT BURDEN

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: CONGRESSIONAL BUDGET OFFICE CAPTION: INTEREST ON THE DEBT