Who’s Afraid of the National Debt?
The Virtues of Borrowing as a Tool of National Greatness
by Lawrence A. Hunter, Steve Conover on 07/25/2001
30 Pages
There is an almost uniform opinion among economists, policy makers and the general public that a persistent national debt is harmful to economic health. However, as a matter of economic and historical fact, the opposite is true. Modest deficits and prudent levels of government debt are nothing to fear because when incurred judiciously and used productively they can benefit—if not bless—a nation.
Unfortunately the majority opinion in today’s Washington is to let the recently generated budget surpluses accumulate in order to pay down the national debt. The practical result of this bipartisan consensus is political stalemate, in which Democrats use budget surpluses to block tax cuts, while Republicans use them to block spending increases.
This study argues for a “debt-burden neutral” fiscal strategy that would stabilize the federal government’s debt burden right where it is at about one-third of national income. This strategy would allow the federal government to borrow additional funds each year sufficient to overhaul the tax code and to convert Social Security into a payroll-tax-financed, worker-investment retirement program. Sound borrowing to create a new tax code and a new investment-based retirement program will produce steady long-term growth, greater security, and a higher standard of living than would rushing to pay off the debt at the expense of other more beneficial endeavors.
Yet one of the main obstacles to achieving these goals is widespread misconception about government debt and debt retirement. The debate is an old one. Alexander Hamilton saw the benefits of prudently managed long-term debt while Thomas Jefferson feared economic strangulation if debt lasted longer than a generation. But Jefferson changed his mind and increased the national debt 12% in one day when he consummated the Louisiana Purchase.
More than a century and a half later President Reagan used public debt to achieve a stunning economic turnaround—one that continues through today. Understanding that people work, save, and invest for after-tax income, Reagan devised a program that cut taxes, promoted sound money, and reduced excessive regulation. The pro-growth strategy worked and with one or two small exceptions when Reagan’s policies were abandoned, America has enjoyed fast-paced uninterrupted economic expansion for two decades.
Yet in those past 20 years leaders from both sides of the political spectrum have found a common anathema in long-term debt and are pushing for fiscal austerity and balanced budgets as the prescriptions for continuing our robust economy. Getting policy makers out of the debt phobia box is a daunting task. It’s necessary first to dispel several myths about debt and then second to explain the many benefits of debt-burden neutrality when new borrowing can be put to great national purposes.
Adopting a debt-burden neutral fiscal policy to maintain a constant debt burden can maximize economic growth and control government spending while permitting the federal government to make long-term investments in major structural reforms. If Congress and the president subscribed to this option, it would be possible to overhaul the tax system and transform the Social Security program into a personal-accounts-based retirement system.
It’s an ambitious goal, but it’s the economically rational thing to do. There’s nothing to fear if a modicum of borrowing is devoted to financing fundamental reforms that yield improved economic performance and lasting prosperity.
If you did not arrive at this web page from within the IPI website, click on the link below to go to IPI: