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Why Pay Off the National Debt?

By James K. Glassman
Tuesday, July 15 1997; Page A19

A balanced federal budget is not even law, much less reality, but already a Republican congressman is proposing legislation to deal with the surpluses he thinks will follow.

A surplus happens when the government raises more than it spends. The last time was 1969, but we're getting closer. The deficit for the fiscal year that ends on Sept. 30 will be about $45 billion.

What to do with the extra revenues flowing into Washington? Rep. Mark Neumann (R-Wis.), in a plan that's been embraced by Speaker Newt Gingrich and become the hot fiscal topic of the summer in conservative circles, wants to use the money to pay off the national debt.

On its face, this sounds like a reasonable idea. It's actually dangerous and distracting. First, it just won't happen: If we start running surpluses, politicians will spend them. That's not just a guess. Just look at this year's budget. With pressure from a burgeoning deficit relaxed, Congress and the White House devised a budget in May that sharply increases the growth of spending.

But let's pretend that Congress and the president can muster the discipline to enforce the Neumann plan. If spending grows at 4 percent (which is, indeed, the rate in the new budget) and if revenues grow at 5 percent (they've been rising at 7 percent since 1992), then the entire national debt can be wiped out by the year 2026 if we use the excess cash to pay off Treasury bonds.

Isn't this an admirable goal? Not really. The federal debt, which is the total of all the deficits we've piled up over the years, isn't such a terrible thing – especially if it remains at current levels. Right now it's about 50 percent of our gross domestic product, but if we run balanced budgets through 2026, it will fall to less than 25 percent of GDP – or back to 1960s levels.

The argument about the evil of the federal debt is based on a fallacy, which is that it's a burden on future generations of Americans. This is what Neumann himself, a former math teacher and real estate developer, means when he says he wants children to "inherit a debt-free nation."

But this popular analysis misses half the equation. If we simply balance budgets, then today's $5.4 trillion debt will perpetually be on the Treasury's books. But that debt will be balanced by $5.4 trillion in assets. Roughly four-fifths of those assets – beautiful T-bonds – are held by Americans. Thus, our children won't merely inherit debt, they'll inherit bonds.

Neumann gripes about the $300 billion or so in interest on that debt. But this money, in fact, is one of the few benign federal spending programs. Private bondholders who earn interest are likely to invest that money more productively than Washington does.

And the interest earners aren't merely fat cats. A 1984 Treasury study concluded, "We find no basis for the belief that interest payments on the public debt lead to greater inequality in the distribution of income." Remember, the top 10 percent of Americans pay 59 percent of all income taxes, so, in a worst case, interest is being paid by the rich to the rich.

The point is that Americans, at the very same time, are both borrowers and lenders, as Francis X. Cavanagh, a former Treasury Department official, explains in "The Truth About the National Debt." He also notes that Abraham Lincoln "may have been the only president to recognize both sides of the ledger."

In 1864, Lincoln told Congress, "The great advantage of citizens being creditors as well as debtors, with relation to the public debt, is obvious. Men can readily perceive that they cannot be much oppressed by a debt which they owe to themselves."

Lincoln was urging Congress to go into debt to pay military expenses. Debt, in other words, is simply a way to get the dollars to pay for what we want government to do. The other way is taxes.

Debt and taxes are simply matters of financing. The truly important public policy question is: What should government do? Fight a war against slavery and on behalf of union? Certainly. Fund railroads, corporate welfare and collective health care systems? I don't think so.

But Congress keeps spending more and more. Total spending will rise from $1.6 trillion in 1997 to $1.9 trillion in 2002 – a rate well in excess of inflation.

Milton Friedman once said that he would rather have a $1 trillion budget that is way out of balance than a $2 trillion budget that is in balance. He's right. The true goal is to reduce government spending. The aim of balancing the budget (or running a surplus) is merely a tactic to secure the prize: a smaller government that takes fewer resources and limits fewer liberties.

Alas, Neumann, like so many Republicans, has been blinded by balanced-budget rhetoric and missed this true goal. Under his plan, for example, an incredible $33 billion out of the surplus would go to replenish the highway trust fund, which would mean more spending on pork. At a meeting last week, Gingrich argued for appeasing big-spending Republicans like the notorious Transportation Chairman Bud Shuster since they represent one leg of the GOP "three-legged stool."

It's a stool that ought to be knocked over. Believers in smaller government have a very simple job to do: Make it smaller. When that happens, Americans will be able to keep more of they earn and the federal debt will simply wither away.

The writer is a fellow at the American Enterprise Institute.

© Copyright 1997 The Washington Post Company

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