The Joy of
Economics: Making Sense out of Life
Robert J. Stonebraker, Winthrop University
The National Debt: So What?
A national debt, if it is not excessive, will be to us a national blessing.
For many years my father has suffered from a curious malady called Debtiphobia, an abnormal fear of the National Debt. I have tried to administer various treatments, but none has been successful. The condition may be chronic.
His disorder occasionally lapses into remission, but is apparently triggered by the sight of an economist and flares up when I visit for Christmas or other festive occasions. It typically strikes when I am in a weakened condition--collapsed on the sofa in front of the television, turkey-stuffed abdomen extending gently over my belt, gearing up mentally for a frontal assault on the butterscotch brownies my mother has lovingly baked for me. It starts innocently enough. Muffled phrases like "irresponsible spending" and "national disgrace" begin to percolate through the after-dinner air from my father's direction. By the time we get to "mortgaging the future" and "pay the piper," my wife has pulled out a book to read, my mother has excused herself and returned to the kitchen and I am left alone to weather the onslaught.
I don't really mind. In fact I much prefer deficit harangues to my father's alternative passion of playing checkers. I've got a fighting chance at discussing economics, but I'm dead in the water with checkers. He's kicked my butt at that game for years.
A large and growing debt
Of course, my father is not debtiphobia's only casualty. Although virtually ignored in medical literature, the disease is widespread. On the surface, debtiphobia seems justified. The national debt IS big and currently stands close to $18 trillion or about $60,000 for each man, woman and child in America. And every additional government deficit drives it higher.
Most economists agree that occasional budget deficits do no harm and, if used to push an economy out of a recession, can be quite useful. However, while traditional fiscal policy prescribes budget deficits during a recession, it also prescribes budget surpluses to slow inflation during economic booms. That rarely happens. Instead of running budget deficits during economic downturns offset by surpluses during good years, governments tend to run deficits in every year. Despite lip service to balanced budgets, we often run for the exits at the sight of tax increases or spending cuts large enough to achieve them. An almost unending string of red ink that piles up more national debt each year results.
Yet, as the data below show, the size of the national debt relative to GDP was
falling until 1980. The huge annual deficits in recent decades -- and
especially in recent years -- drove the
ratio up, but the current level is well within historical bounds and also stands
well within the normal range of other industrialized nations. It has not
thrust us to the brink of bankruptcy.
National Debt National Debt
($ billions) as % of GDP
1940 $51 50%
1945 260 122
1970 381 38
1980 909 33
1990 3,206 56
2000 5,629 57
2010 14,025 92
2015 18,825 99
Moreover, the national debt is not like debts you and I might incur. It is money that we, through our collective representative the government, have borrowed from ourselves. Our personal debt is external; it's owed to others. Most of the national debt is internal; it's money we owe to ourselves. Although some of the debt is owned by foreign interests, two-thirds of it is held by U.S. creditors. In fact, the largest creditor of the government is the government itself! Over 40 percent of the national debt is owned by government agencies -- mostly federal, but some state and local.
The national debt need not be repaid in the same sense that private debt must be repaid. Most government debt is in the form of short-term Treasury bills that mature every 90 days. When one set of Treasury bills matures, the government simply pays them off by selling more. As long as it offers competitive rates of return on "safe" bonds, the government will be able to refinance or "roll over" its debt indefinitely. As a result, we need not worry about burdening our children with repayment. They won't repay the debt. Like us, they will refinance and pass it on.
More importantly, the official data badly misstate the true importance of the debt. The government does have debts, but it also has assets. If I can borrow $500 and buy a capital asset worth $600, I'm better off, not worse off! What matters is government net worth, not the value of its debt. The numbers are somewhat subjective (how can we measure the value of the Capitol or Yellowstone National Park?), but researchers calculate that our government net worth remains solidly positive.
Does that mean deficits and debt pose no economic problem? Not necessarily. Government borrowing impacts credit markets and pulls dollars and resources into the public sector. If the economy is in a recession and these resources otherwise would have been unemployed, no damage is done. In fact, deficit spending designed to put these resources back to work is the traditional fiscal policy recommendation to stimulate the economy and eliminate the recession. But, if the economy is already at or near full-employment, deficits will "crowd out" private investment.
When the government borrows, it competes for scarce loanable funds with private firms that also want to borrow. Like any other market, increased demand creates a shortage that, in turn, drives up prices. When the government wants to borrow, its new demand creates a shortage of loanable funds that drives up the rate of interest. The higher interest rate makes borrowing more costly and discourages private firms from borrowing and investing. The would-be private borrowers are crowded out of the market. Monies that might have been loaned to finance research and development or new manufacturing capacity in the private sector are loaned to the government instead. Unfortunately, with less research and development and less manufacturing capacity, productivity and long-run economic growth will suffer. As a result, current fiscal prolificacy can lower the standard of living our children will enjoy.
On the other hand, crowding out does not always cause lower productivity and growth. Suppose the government borrows $100 million that would have been borrowed by General Mills to modernize its cereal factories. We lose the $100 million of private investment, but what do we get in return? What does the government do with its $100 million? If the $100 million is wasted on unproductive Congressional junkets to Bermuda, future generations are harmed. They inherit a smaller and less productive stock of capital with which to work. But, suppose the $100 million is used to educate a new work force or to rebuild our transportation infrastructure. These are productive investments and are indispensable building blocks for our future economic well-being.
The critical question is which project will benefit future generations the most--modernized cereal factories or new education/infrastructure. As long as the government spends its borrowed dollars on investments at least as productive as the private investments it crowds out, no damage is done.
To test your understanding of the major concepts in this reading, try answering the following:
1. Explain the concept of National Debt; explain what it is, who holds it, and how federal deficits and surpluses affect it.
2. Describe historical trends in the U.S. national debt and our debt-to-GDP ratio since 1940.
3. Discuss why our national debt, unlike private debt, may never be paid off.
4. Explain how, and under what circumstances, the creation of a national debt can harm or be a burden to future generations.
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