Debt Doesn't Have to Be A Burden

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By Steven Pearlstein
Wednesday, March 4, 2009

Suddenly there seem to be lots of people who think our biggest economic problem is that President Obama and the Democratic Congress are about to saddle our grandchildren with a mountain of government debt so high that they -- and the U.S. economy -- will never be able to get out from under it.

Before we get to the substance of the complaint, allow me to bring a bit of old-fashioned journalistic skepticism to the rants of Republican politicians and talk-radio bullies who are trying to pass themselves off as born-again deficit hawks. These are many of the same folks who saw no problem running up record deficits in the middle of an economic boom by pushing through the biggest tax cut in history, increasing entitlement spending, and waging a terribly long and costly war. Their recent moralizing about the evils of government debt has the distinct odor of hypocrisy and political opportunism.

That's not to say there isn't good reason for people of good will to worry about the federal debt. Largely because of the profligacy of the Bush years, the debt is already too big and will only get worse unless we begin to slow the growth in spending for Social Security, Medicare and Medicaid. Let's keep our eye on that big problem -- the $66 trillion unfunded liability -- not the $2 trillion or so in additional borrowing that the government is about to take on to rescue the financial system and stimulate the economy.

What's missing in all this sudden hand-wringing over the deficit is any sense of perspective. Two trillion dollars sounds like a lot of money, but in a pinch we could pay it all back in just one year if we were willing to reduce household and government spending by about 15 percent. It would require temporary sacrifice on everyone's part but would hardly be the death of the American dream.

The more important point, however, is that by having the government borrow this extra $2 trillion, our grandchildren will be better off financially than if we did nothing and let economic nature take its course.

Think about it this way:

The U.S. economy is in the midst of a painful adjustment from spending the equivalent of 106 percent of what we produce each year -- which is what happened for most of the past 20 years -- to spending 96 percent of what we produce and putting aside a modest 4 percent for savings.

The only way we were able to consume more than we produced was that the rest of the world was eager to lend us the balance, knowing that we'd use it to buy their sneakers, cars, computers. We also used some of the money to try to outbid each other for real estate and financial assets, driving them to price levels that were ridiculously above their underlying economic value.

All that came to an end beginning in the spring of 2007. The cheap and easy credit went away, the asset bubbles burst and we've had to confront two painful realities. One is that we were never really as rich as we thought we were. The other is that we had significantly overbuilt the economy in response to consumption levels and asset prices that were basically a mirage. Now, every day, we are forced to watch the painful adjustment process play out as households cut back on their spending and businesses close stores and factories, lay off workers, and reduce their investment in plants and equipment.

Implicit in this process is a massive "deleveraging" of the economy as households and businesses and banks cut back on the staggering amount of debt they had built up during the credit bubble.

By the middle of 2008, for example, American households had build up debt of $13.9 trillion, more than double what it was a decade before. Businesses had accumulated debt of $10.9 trillion, also doubling in a decade. And financial institutions had piled up debt of $16.6 trillion, up from $6.3 trillion in 1998.

And the federal government? During that same period -- drum roll -- its debt rose from $3.8 trillion to $5.3 trillion.


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© 2009 The Washington Post Company

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