There “does not exist an engine so corruptive,” Thomas Jefferson wrote in 1821, “of the government and so demoralizing of the nation as a public debt. It will bring on us more ruin at home than all the enemies from abroad . . . ” Jefferson left Paris in 1790 three years before the French guillotined Louis XVI. Before the Revolution, the king’s debts were so large that interest payments ate up 70 percent of his tax receipts. We are not quite there yet, but the American public is deeply worried about the country’s future in view of our huge national debt. Our severe debt problem has arisen very quickly, in about a decade. Just a short time ago we were worrying about the “problems” of a debt-free country.
On January 25, 2000, President Bill Clinton called a press conference to announce that his 2001 budget put America on the path to pay off the national debt by 2013. The country was last debt-free in 1835 under Andrew Jackson. In 1998 and 1999 the country ran historic surpluses and paid down outstanding debt. In 2000, the debt owed to the public was $3.8 trillion. The Congressional Budget Office (CBO) supported the President’s projections, estimating that the debt would be down to $941 billion in 2010. At the press conference, the President was asked whether a tax cut was possible. A “modest cut,” he replied, might be possible, but “the most important thing—I will say again, the most important thing is to keep our fiscal discipline, to keep paying down the debt, to get the country out of debt . . . ” We must “stay the course and seize this historic opportunity.” The President, however, warned “as I have said over and over again, there is no room for complacency. We got here by making hard choices and sticking to a strategy that works. Our children and their children will not inherit the crippling burden of interest payments . . . ”
What does a debt-free country look like? President Clinton said “getting the Government out of competition for loans, which makes interest rates lower over-all” would save the “average family $2,000 a year on their mortgage or $200 on a loan for school or a car.” Paying off the debt also made room in the budget to take care of the coming problem in entitlements. The solvency of Social Security could be extended to 2050, and Medicare to 2025. Clinton concluded that we would enjoy, in a debt-free country, “more investment, more jobs, higher wages for Americans.” In December 2000, as he was preparing to leave office, the President said the financial situation had improved, and he now projected the country would be debt-free in 2009 or 2010. The Treasury, in response, stopped issuing 30-year bonds because it did not believe we would be in debt that long. The projected shrinking supply of Treasury securities led the financial community to worry that investors, traders, and borrowers would need to find new benchmark securities to invest in, hedge with, and compare themselves with.
Those are the “problems” of a debt-free country.
President Clinton’s successors, however, did not stay the course. They were diverted by tax cuts, wars, social spending, and bailouts. The country quickly shifted from surplus to deficit. President Bush pushed the debt to $5.3 trillion in 2008, and President Obama pushed it further to $11.7 trillion in 2012. The Debt Clock in Times Square (and at the Republican National Convention) flashes a national debt over $16 trillion. The debt owed to the public, however—setting aside the Social Security and other trust-fund debt that we owe to ourselves—is $11.7 trillion, of which $5.1 trillion is owed to foreigners, with China and Japan leading the list at about $1 trillion each.
The candidates in the recent election did not talk about paying down the debt, much less paying it off. Both hoped to stabilize—not pay off—the debt in 20 years or so. President Obama projects deficits rolling on as far as the eye can see; his numbers show the debt will be $17.3 trillion in 2020. The Simpson-Bowles Commission does not project a balanced budget until 2035. (In 2020 it shows a $15.2 trillion national debt if its recommendations are followed.) The Ryan Plan does not provide for a balanced budget until 2040: In 2020, it shows a $15.7 trillion national debt. The existing plans implicitly assume a perpetual debt.
What does a debt-ridden country look like? Look around you. A debt-ridden country, like a debt-ridden individual, is not the master of its own fate. The interest burden prevents freedom of action. We get the opposite of what President Clinton projected for a debt-free country—that is, less investment, fewer jobs, and lower wages for Americans.
Some, like Prof. Paul Krugman, say that debt doesn’t matter much. A year ago, Krugman wrote in the New York Times that public debt is unlike family debt because “families have to pay back their debt. Governments don’t—all they need to do is ensure that debt grows more slowly than their tax base.” Krugman continues, “an over-borrowed family owes money to someone else; U.S. Debt is, to a large extent, money we owe ourselves.” So there is no burden on the future—some will pay taxes to pay interest, but others will be paid interest—a net wash. Well, if you are the payor, you may not think it’s a wash. And, of course, as noted above, almost half the debt owed to the public is owed to foreigners.
The trouble with debt is that it must be repaid. Krugman is right that there is a difference between family and public debt, but his deductions are wrong. The trouble with public debt is that it undermines democratic government. First, it places a burden on future generations without their consent. Second, it makes vast sums available to government without making the public fully aware of it. Does anyone think the Vietnam or Iraq wars would have taken place if they had had to be paid for out of current taxes? The most feckless family knows it must repay debt, but government agrees with Professor Krugman: It doesn’t have to repay—after all, the debt problem will have to be faced by a different set of politicians. Finally, Krugman argues there is nothing wrong with asking future generations to pay because they will have benefited by the expenditure. This argument could be plausible if we were leaving future generations a bridge or some project of value. It is not plausible when the debt went to finance deficits, pointless wars, and bailouts of profligate bankers.
We are likely capable of living with a perpetual debt. The question is, Do we want to live like that? Paying taxes to pay interest on debt incurred for failed policies is depressing. New York in the 1840’s was brought, as Comptroller Flagg said, to “the very brink of dishonor and bankruptcy” by profligate legislative borrowing for canals and railroads. In 1842 the New York legislature passed the “Stop and Tax Act,” which stopped construction and levied a new tax. The state called a constitutional convention in 1846 to make sure it could never happen again. Delegate Arphaxad Loomis told the 1846 New York convention that debt restrains the freedom of future generations without their consent: “The legislature and the people . . . never had the right to legislate for the future, to enthrall and bind down those who came after them either by debt or any other system of legislation which would prevent them from a perfect freedom of action.” The solution was to take the debt-making power from the legislature: The 1846 state constitution required a vote of the people before any debt could be issued.
The FY 2012 federal budget is severely out of balance, with $2.5 trillion of revenues and $3.8 trillion of spending. In 2000, the outstanding debt to the public was $3.4 trillion, and we paid $223 billion in interest; the rate on the debt was 6.5 percent, and it made up 12.5 percent of total government receipts. In 2012, the debt to the public was $11.7 trillion, and we paid $225 billion in interest; the rate on the debt is two percent, and it made up nine percent of total receipts. If we had to pay 2000 interest rates on the 2012 debt, it would cost us $696 billion, 28 percent of total receipts. That does not leave room for much else. Indeed, using current figures we could pay for interest and entitlements, but would have to borrow for everything else.
The Fed, consequently, will try to continue to control interest rates. It will pursue a zero or very low interest policy permanently. Can capitalism work at zero interest? The policy distorts the economy and badly hurts those institutions that rely on endowment income (pensions, museums, operas, universities), as well as individuals who saved for their retirement. Exactly what the country would look like with a permanent zero-interest program is hard to say, but the drag of debt will dominate the culture. And the government’s ability to control interest rates indefinitely is doubtful: At some point lenders will want more than a two- percent return.
The country pretty soon will have to decide whether it will restore the Jefferson-Clinton goal of a debt-free country, which would require all hands on deck, or learn to live with a perpetual debt and its consequences.