Many Americans fear that the steadily rising national debt will someday, somehow, bankrupt us all. I hear this from you in letters and worried questions after speeches and seminars. It's not an everyday worry, like how to pay the electric bill. Rather, it's one of those generalized, free-floating fears that keep so many of us on edge.
Almost $37.1 billion o fyour tax dollars last year went for interest on the national debt. That's $170 for every man, woman and child in the United States. Interest due on the debt has risen almost every year in modern times. As of last week, the size of the debt was a staggering $670 billion.
How will we ever pay off this money? Should we expect to? And what happens if we don't?
I put these questions to George Benston, professor of economics at the Graduate School of Management, University of Rochester. Personally, Benston is a free-enterpriser who thinks that private business and individuals make far better use of money than government does. This aside on Benston's private attitudes is important, because his answer to the national debt question may surprise you.
"Looking at the debt alone," Benston says, "there's no danger in the fact that it goes up every year. As a nation we grow wealthier every year. Real economic growth, after inflation, is up 27 per cent in the past 10 years alone. All that increased wealth generates tax dollars to pay the interest on the growing debt."
The debt itself is not merely a ledger entry. It materializes in the form of Treasury and federal-agency bills, notes and bonds. When investors buy Treasury bills, they are taking a piece of the national debt. The interest they get from the government isrecirculated into the economy, so nothing is lost.
"There's no reason for a nation ever to get out of debt," Benston says. He compares the country to a corporation that always has bonds outstanding. Bonds represent money owed. Some people cash in their bonds and others buy new ones. But as long as the corporation's value and earnings increase, so can its overall level of indebtedness.
"As we grow richer, we are able to support a larger and larger debt," Benston says. From time to time the growth in America's wealth slows or declines briefly. But the long-term trend is always up. If growth ever leveled off permanently, we'd have to consider leveling off the national debt. But there's no need to do that unless it actually happens.
Furthermore, if all this debt were eliminated, it would increase the gap between the rich and the poor in this country. Tax money would be taken from all the people and used to pay off the holders of Treasury bills and bonds.
The real problem, says Benston, is not the growing size of the debt itself but whether the borrowed money is being used productively. Productive use is for expenditures that might increase the nation's wealth, like dams, river clean-up projects, and urban development. This raises economic values, which raises tax receipts to help cover the debt. In effect, this kind of debt can eventually pay for itself.
On the other hand, it's dangerous to go into debt for current expenses, like higher farm price supports or welfare payments. These don't create future wealth. If we want these things from the government, we should tax ourselves currently to pay for them, Benston says.
Unfortunately, a lot of people (not just the poor) want favors from the government but don't want their taxes to go up. So the government borrows the money. If real wealth isn't there in the future to pay the interest, the government sponsors a little inflation.
In short, the national debt can go up and up without leading to a bust. But it can encourage inflation and, to the extent that government spending is less efficient than private spendings, slower growth.