Tuesday, July 19, 2011
The Virtues of Debt
For something that has done so much for so many for so long, debt has certainly been getting a bad name lately.
In the history of this great nation, debt has funded the Revolutionary War, the Louisiana Purchase, the Civil War, World Wars I and II, and the building of the Interstate Highway System, among other things. Alexander Hamilton, right as usual, wrote that the national debt is part of the nation’s capital.
If you are a typical American, debt may have enabled you to get a college education, buy a house and own a car. For businesses, debt has provided a means of raising start-up money, financing expansions and getting through a rough spot.
Yet from Polonius to Ben Franklin to nearly all the present-day commentariat, debt has been described to us as a bad thing. (Franklin’s strictures against debt in Poor Richard’s Almanac take on a level of high irony when you consider that perhaps the greatest service old Ben ever did for his country was sweet-talking France into lending us the money for the War of Independence at a time when that loan looked more like a flutter at the roulette table than a wise investment.)
Debt, like alcohol, is a problem when people can’t handle it or can’t stop. And it’s more of a problem for people than it is for governments because you and I don’t have the options for dealing with it that a properly run government does.
The last two times the federal budget deficit got really high were at the end of World War II and at the end of the 1980s. In the first case the federal government kept taxes at a significantly higher rate than today, continued to invest in programs that helped people (the GI Bill, housing programs), and benefited from a sustained period of economic growth with an underlying basis of broad prosperity. In the second case, Bill Clinton got a tax increase through Congress (by one vote in the House), which, coupled with an economic recovery, sharply reduced the deficit within a few years.
I’m not an economist, so I try to look at what’s worked before and figure that when in doubt, let’s try that again. I can’t come up with an example where cutting taxes and government spending led to a stronger economy. The prosperity of the Reagan years was fueled in part by a government stimulus program that made President Obama’s look like a dime-store plan. The difference is that instead of calling it an “economic stimulus plan,” Reagan called it “defense spending,” so the right didn’t object.
Another consideration in looking at public debt is that some countries have more options than others. People point to Greece and worry that we’re headed in that direction. Maybe we are, but I have doubts.
America has enough rich farm land and productive capacity to feed itself and a fair chunk of the rest of the world as well. We have Wall Street, Silicon Valley and Hollywood. All those things generate an enormous amount of money worldwide and provide a vast tax base that can generate revenue to pay down deficits. On top of all that, we have our own currency and can decide how much money to print.
For years governments and churches tried to ban usury, until it became such a business necessity they had to stop. For years, governments threw people in jail for not paying debts, assuming that they had been profligate, rather than unfortunate. Those attitudes are gone, but we still seem to cling to an idea that public debt is inherently evil. It’s not an evil; it’s a tool, and good policy would recognize that and focus on using it prudently and effectively.