Economists generally believe the best level for our National Debt (ND) is zero - that is, no debt at all. They also believe we must balance the budget each and every year. If our ND is "considerable", we must "tighten our belts", sacrifice, increase taxes, and do whatever is necessary so we can show a surplus, and get that ND down to zero where it belongs, even if it "necessitates" a higher unemployment rate and preventing or delaying a boom!
I will try to show that all of the above is quite wrong.
Let's first try to get an idea of what would constitute a status quo situation insofar as the debt is concerned. If the ND equals the Gross National Product (GNP) for 2 years in a row (as in 1948 & 1949), a nation, although appearing heavily in debt, has actually maintained the status quo. Even if the debt had increased considerably in the second year, the increase in the GNP would have offset the increased ND. (Immigration, greater birthrate than deathrate, or inflation, might account for the higher GNP.) Since ND/GNP (the RATIO of the ND to the GNP) remained the same, the country's ABILITY to pay off the ND remained the same! I know of no better and simpler way to measure a nation's ability to cope with its ND. The lower the ratio, of course, the greater its ability.
This ratio is useful and instructive since its value is unaffected by population, or changes in population, inflation, or the hardness of the money or its relative value to gold. In addition, ratios may be compared from nation to nation and from decade to decade.
Referring to the large table at the end of this article, let's extract the ND/GNP ratio for several years of interest in order to get the concept across:
YEAR ND/GNP
1940 0.43
1946 1.28
1965 0.45
After TRIPLING the ND/GNP ratio from 1941 to 1946, we managed to return it to the 1940 level by 1965. Clearly, we had completely paid for WWII in just 20 years after WWII ended! It's interesting to note that the generation that fought a war not of their making, also paid for much of it.
Why, in fact, should the elimination of our National Debt be our theoretical goal? Why not a National Surplus? Certainly if a National Debt is undesirable, a National Surplus would be desirable! Fair question. We'll answer it in just one paragraph:
What we actually would like to determine is that level of ND/GNP that will presently and ultimately provide more Americans with maximum happiness. Clearly, an ND many times the GNP, especially when interest rates are high, would place a devastating burden on a country, particularly if the debt were incurred inefficiently (by a war, for instance). On the other hand, very large deficits and long-term debts can be justified if the programs for which this money will be used can be shown to improve some aspect of the society so the outlay can be considered an investment that will pay for itself over and above expected interest rates. Since such programs always exist, it can be stated that some level of ND is better than no ND at all - and that a National Surplus would thus be counterproductive and not in the present or future best interests of the country. There's nothing wrong with borrowing money, folks. Prudent borrowing for valid purposes allows individuals, corporations, cities, OR NATIONS, to progress faster or to accomplish tasks that would NOT have otherwise been possible. It's done all the time. You and I have done it.
The Gov't must be careful to examine each and every program, however, to find why it wasn't pursued by the private sector which is ever ferreting out any enterprise that can offer a good return at low risk. If the private sector rejects it, there's usually a very good reason, in which case the Gov't, which always is less efficient than private industry, undoubtedly should NOT get involved, either by itself, or by subsidization. The Gov't should only pursue those beneficial and cost-effective programs that, despite a fair return, wouldn't, for other reasons, interest a private company. Reasons for such lack of interest might be: (a) excessive capital required, (b) excessive time required for the return on investment, (c) too much risk, or (d) insufficient return on investment. The kind of project the Gov't might be fit for is the funding of promising, but vast, programs not otherwise within the capability of private industry, such as space colonies, that are capital intensive but highly profitable, and will undoubtedly benefit the society in ways we could never imagine. Another profitable project might be to research the negative eugenic consequences of our present immigration profile and the necessary monitoring of our borders, where a dollar spent today will save much havoc and heartache tomorrow, and help preserve our gene pool. Still another Gov't duty could be to determine the effect of violence, vulgarity and sex in the media which clearly, together with drugs, causes so much crime. (Eliminating the hated Form 1040 would go far toward alleviating the "Crime's-OK-Hate-Gov't" atmosphere rampant in America.) Also, any funds spent on the de-regulating and de-bureaucratizing of America would be money very well spent. Our bureaucratic do-gooders just don't realize how sophisticated Americans are, and that we just don't need, and don't want, a Big Brother out there telling us what's good and what's bad for us.
Another way of looking at the ND/GNP ratio is to ask how many man-hours of labor it would take for each working American to pay off his share of the ND. In 1985, for instance, American workers would earn the ND in about 800 hours, or about 5 months. In 1945 it was 2500 hours, or 15 months! (The time, in years, equals ND/GNP.)
But how can this be? In just about every year since 1945 we've failed to balance the budget, and yet we've paid off World War II, vastly improved our quality of life, and still managed to decrease the debt burden of every American in an orderly manner.
The answer is that more Americans are working more efficiently, backed up by a more highly developed infrastructure.
MORE AMERICANS: Doubling the population with similarly industrious and intelligent people essentially doubles the GNP and thus cuts the ND/GNP in half. There's nothing wrong with amortizing a nation's past spending over a larger population of a subsequent generation. Some would object to one generation leaving its debts for the following generation to deal with, but this is only true if all our expenditures were for useless or frivolous or inefficient or misdirected programs.
EFFICIENCY AND PRODUCTIVITY: If one compares present wages and prices with a century ago, he'll find that wages are about 100 times higher now, but that prices are only about 6 times higher. Increased productivity makes the difference. A man will do in an hour today what it took two man-hours to do 25 years ago and is part of the reason we were able to pay off WWII so quickly - because we paid off TWO 1940 man-hours with, due to greater productivity, only ONE 1965 man-hour.
HIGHLY DEVELOPED INFRASTRUCTURE: Much of our spending will present to the next generation the fruits of our research, labor, and experience - be it tangible or intangible. A greatly improved infrastructure will result in new and better products, delivered more quickly, for business, pleasure, or research. In any accounting system but the Government's, these contributions would be seen as valuable assets counted toward the net worth of America, and figure up as considerably greater assets than the relatively small deficit incurred to accumulate these assets.
Yes, the inflated dollar is cheaper now than the dollar we borrowed 40 years ago. But that's not how we got off the hook and paid for WWII. Yes, we paid off our debt with cheaper dollars, but we paid dearly because of the inflated interest rates we suffered most of those years.
Just a word about inflation: The greatest harm and waste caused by inflation, and the fear of inflation, is that they have made both government and industry afraid of expansionist policies and have deprived the country of billions of dollars of production and millions of man-years of employment which the country could have had if it had not made a fetish of a stable price level! The resulting unemployment from short-sighted Gov't tight-money policies soon results in ill-conceived stopgap measures, usually involving welfare throwaway spending or inefficient, pork-barrel, make-work, legislation. Inflation should be feared only because of the faulty Gov't policies and legislation it elicits. Remember, spending too much for everything is more fun than not being able to afford a lot of cheap stuff! The surprising paradox is, however, that loosening the purse strings for quality projects in times of unemployment will actually improve the ND/GNP ratio.
Note that we paid off WWII in just 20 years despite all those 100's of billions of 1940 dollars going into useless hardware for the purpose of killing. Had all this money and effort gone into projects having long-term benefits, imagine what America would be like today. The fact of the matter is that our free-enterprise, profit motive, capitalistic system has an incredible ability to produce goods and services and to profit and pay off wars and other expenditures, all this despite the cost in-effectiveness of U.S. Federal and State over-regulation and mis-directed bureaucracies. Our founding fathers would be spinning in their graves if they knew how we've abrogated their concept of freedom and the limitation of governmental regulation.
But would America of the early 40's have spent 100's of billions of dollars were it not for WWII? Of course not! The reason is that no President, nor Congressman, past or present, ever had the economic understanding that we'll have by the end of these few paragraphs. By this lack of understanding, America TODAY is being held back from phenomenal progress and a great near-future. Were a great war forced on America today, Congress would think nothing of spending TRILLIONS of dollars every year for useless purposes. However, being "constrained by peace", they balk at even the most promising projects. Take, for instance: Space! America in 1985 is in a position to greatly benefit by expanding outward - unshackling itself from Earth. As detailed in "The Case for Space Colonization - Now!", a bargain at $2, there are a great number of reasons why America should - why we MUST - construct and colonize a very large space station, now! For an outlay of only about 20 billion dollars a year, for the next 10 or 15 years, we would benefit in a short time to an unimaginable and unpredictable extent. Even the predictable benefits would soon repay all the costs plus interest. The intangible benefits would be enormous! But Congress doesn't understand ND/GNP. They're only interested in OSHA and FTC and FDA and in adding more complexities to the most idiotic and cost ineffective tax collecting system in the world!
One last word: Note how our ND/GNP ratio has gone up during the Reagan administration from 0.35 to 0.42. Many would jump on The President for this. However, in perspective, this jump is merely a "blip" when one considers what has been accomplished - namely decreased unemployment, decreased taxes, a strengthened dollar, an armed America, inflation controlled, and the American's love of America revived! In addition, many of these deficit dollars of the last few years have been used in laying the foundation for making a greater America, having greater technical and economic depth, and with greater protection for us and our allies against Russian expansionism. Our system has proved its ability to absorb and "normalize" such tremendous ND/GNP ratios in the past, that the "Reagan Blip" is inconsequential. His policy of forcing Russia to try to match us in guns AND butter will eventually bankrupt them or cause them internal problems, either of which may just finally force them to see the handwriting on the wall: that Communism can't hold a candle to Capitalism, even though Russia has more land, greater resources, more people (with more patriotism), and better quality people, than America. One need only look at the Japanese and German miracles to see how an intelligent and industrious people can excel given Capitalism - when just 40 short years ago their countries were in rubble and ruin. Were Russia to adopt the Capitalistic System, America would indeed be buried, economically, in a generation or two, especially if they could keep the trade unions from rearing their feather-bedding heads.
All of the above goes a long way toward explaining why our interest rates are so much higher than our price-inflation rate. This rate DIFFERENCE is an extremely important value which we will label "T" (for "True", since it measures the true cost of borrowing money). The Gov't's fetish with being tight-fisted results in tight money and abnormally high interest rates. There's much important work to be done in America, and loosening the purse strings would allow us to get on with it, and benefit from it, both immediately and in the long term.
If expenditures are spent usefully and efficiently, fewer workers are needed to accomplish the same tasks, and the wage-inflation rate would be minimal - but ONLY IF the unions can be controlled. It's funny about unions - their leaders are usually left-wingers, & often card-carrying Communists, especially overseas. Yet these leaders don't seem to realize that if the Russians ever took over, unions would no longer exist! In any event, were we able to achieve a very low wage-inflation rate, then lo-and-behold, we could see a slow, controlled, price DEflation due to our ever-increasing productivity. Interest rates would be well under 2% as they were during WWI and WWII. Space colonies and other capital-intensive projects would then calculate out to be extremely cost-effective. The cost-effectiveness of long term projects is extremely sensitive to the interest rates. In fact, the number of years you can plan ahead is about 50/T. ("T" is defined in the previous paragraph.) For instance, if T = 5%, then plans more than 10 years ahead are uncertain because of the high true cost of the invested capital before a return can be realized. And these returns must be very large to make a project viable, often putting impossible constraints on the whole project and thus killing it off at the planning stage. On the other hand, a T of just 1% would allow consideration of 50-year tasks (such as space colonies) to the phenomenal benefit of mankind, but mostly to the country that first succeeded at these tasks.
"Hey!", you say, "Fewer workers accomplishing the same tasks smacks of unemployment. Whattaya do about that?" Well, sure, back in 1790, 90% of Americans were farmers. Now it's just 3%! Food's a better deal now. Shall we go back to the old way? Of course not! We could go to a 4-day, 36-hour week, but until the Russians get off their high horse, the 40-hour week is pretty much here to stay. The answer is to spend a few bucks and get all those unemployed off the dole and make honest taxpayers out of them. A lot of work will get done, we'll get something for our money, there'll be less crime, less grumbling, and, surprisingly, much less of a deficit than expected. In fact, the ND/GNP ratio could well fall to pre-WWI levels. Remember, though, we showed a zero ND is NOT desirable.
All your life you've been listening to the same propaganda needle caught in the same establishment groove: a debt is bad, a surplus is good, inflation is bad, balance the budget, booms are bad, unemployment is healthy! And, as is so often the case with "authoritative information", we've been misinformed.
Now that our eyes have been opened, let's think about that Gramm-Rudman Law (requiring a balanced budget by fiscal 1991). Surely, in the light of what we've learned above, it's clear that forced automatic spending cuts will NOT benefit America. We've already shown that a surplus, or even a balanced budget, is counterproductive. Also, Gramm-Rudman's across-the board cuts often make little sense. For instance, the National Science Foundation's budget for funding basic research has been decimated. A proposal submitted to the NSF, though having superb potential for making important and beneficial findings, has little chance of obtaining any support. Research is America's best investment and funds should be found EVEN IF THEY MUST BE BORROWED!
NATIONAL
DEBT G N P INTEREST UNEMPLOY-
YEAR (BILLIONS) (BILLIONS) DEBT/GNP RATE MENT RATE
1790 0.074 0.24 0.308
1791 0.075 3.13
1795 0.081 3.94
1800 0.083 0.338 0.246 4.07
1805 0.082 5.06
1810 0.053 0.435 0.122 5.37
1814 0.081 5.67
1815 0.100 5.75
1816 0.127 5.68
1820 0.091 0.677 0.134 5.63
1825 0.084 5.20
1830 0.049 1.11 0.044 3.91
1835 0.000 0.000
1839 0.003 1.54 0.002
1840 0.004 1.75 0.002 4.37
1844 0.013 1.80 0.007
1845 0.015 6.93
1849 0.054 2.32 0.023
1850 0.063 6.00
1854 0.041 3.53 0.012
1855 0.036 6.42
1859 0.059 4.17 0.014
1860 0.065 4.89
1861 0.091 4.40
1862 0.524 2.51
1863 1.120 2.21
1864 1.816 2.96
1865 2.68 2.89
1866 2.77 4.80
1870 2.48 5.21
1871 2.35 6.71 0.35 5.34
1874 2.25 7.53 0.30 4.75
1879 2.25 9.18 0.25 4.68
1884 1.83 11.3 0.16 2.98
1889 1.64 12.5 0.13 2.50
1890 1.58 13.1 0.12 2.28 4.0
1891 1.56 13.5 0.12 2.40 5.4
1892 1.63 14.3 0.114 1.44 3.0
1893 1.60 13.8 0.116 1.71 11.7
1894 1.67 12.6 0.13 1.67 18.4
1898 1.80 15.4 0.12 2.09 12.4
1899 1.98 17.3 0.11 2.02 6.5
1904 2.2 24.2 0.09 1.12 5.4
1909 1.15 31.6 0.036 1.90 5.1
1910 1.2 35.5 0.034 1.78 5.9
1913 1.2 39.6 0.030 1.91 4.3
1914 1.2 38.6 0.030 1.91 7.9
1915 1.2 40.0 0.030 1.91 8.5
1916 1.2 48.3 0.025 1.91 5.1
1917 3.0 60.4 0.050 4.6
1918 12.5 76.4 0.16 1.4
1919 25.5 84.0 0.34 2.43 1.4
1920 24.3 91.5 0.27 4.19 5.2
1921 24.0 69.6 0.34 4.16 11.7
1922 23.0 74.1 0.31 4.31 6.7
1925 20.5 93.1 0.22 4.30 3.2
1929 16.9 103.1 0.16 4.01 3.2
1930 16.2 91.1 0.18 4.07 8.7
1931 16.8 76.3 0.22 3.64 15.9
1932 19.5 58.5 0.33 3.07 23.6
1933 23.1 56.0 0.41 2.98 24.9
1935 32.0 72.5 0.44 2.57 20.1
1940 43.0 100 0.43 2.42 14.6
1941 49.0 124 0.40 2.27 9.9
1942 72.4 158 0.46 1.74 4.7
1943 136.7 192 0.71 1.32 1.9
1944 201 210 0.96 1.30 1.2
1945 259 214 1.21 1.40 1.9
1946 269 210 1.28 1.75 3.9
1947 258 231 1.12
1948 252 258 0.98
1949 253 257 0.98
1950 257 285 0.90 2.24 5.3
1955 274 397 0.69 2.32 4.4
1960 284 506 0.56 3.30 5.5
1965 313 688 0.45 3.68 4.5
1970 370 982 0.38 5.56 4.9
1975 533 1530 0.35 6.35
1980 908 2630 0.35 9.03
1982 1140 3070 0.37 11.4
1983 1380 3310 0.42
1984 1564 3801 0.42
1986 2120 4278 0.51
1988 2601 4908 0.54
1990 3286 5524 0.59
1992 4077 5866 0.69
1993 4411 6177 0.71
1994 4693 6560 0.72
1995 4974 6882 0.72
1996 5225 7266 0.72
1997 5413 7720 0.70
1998 5526 8147 0.68
1999 5656 8608 0.66
2004 7444 10600 0.70 3.5 5.4