The Wisdom of the National Debt

A lot of people seem to think that our tax surplus—and it is anybody’s guess what that will be—should be used to pay down the national debt. Not add a lot of new programs, not cut taxes, but get rid of the debt.

This is a puzzling view. Large corporations do not sit around wondering how they can get rid of their debt. They may worry about paying the interest on it, but if they can—and the vast majority can—they worry about a lot of other things they find more important, such as increasing sales or raising their stock price. Debt, far from preventing these things, often helps them. To increase sales, you borrow money to build new plants or acquire more firms. To boost the stock price, you may add debt so that the company has the right degree of leverage.

But ordinary people, Democrats and Republicans alike, don’t seem to think that way. Many of them want the debt paid down, and many politicians are eager to support them, even though getting rid of the debt means (if you are a liberal) less money for education or health and (if you are a conservative) less money for lower taxes.

But, you may say, if we had less debt we would have less interest to pay, and with the money we saved from lower interest payments we could either buy more programs or cut taxes. But that is a very expensive and time-consuming way to find new money. Let’s use President Clinton’s own budget estimates. In his plan submitted earlier this year, he expected that between 1999 and 2000 we will spend about $9 billion less in interest. Between 1999 and his estimate for 2002 (and any number going out that far is bound to be a wild guess) we will spend about $30 billion less in interest. It will take a long time before less interest produces much money for either new programs or tax cuts.

A deeper problem, however, is that it is not obviously a good idea for the federal government to have no debt. On this matter I commend to you the recent essay by economist John Makin of the American Enterprise Institute in Washington, D.C. “Paying off the national debt would leave global financial markets with no benchmark risk-free asset in the form of U.S. government securities.” In plain language, American Treasury notes and bonds are a fundamental basis for a stable world financial market. Mexican government bonds, for example, are priced as a spread over U.S. Treasury bonds. Our bonds make up a common currency in which money from every part of the world can be invested with complete confidence.

They are also a means whereby our government can borrow easily whenever the need arises (and given our underfunded Medicare obligation, that need is just around the corner). And they are a way of providing risk-proof security for firms, like life insurance companies, that require them, and for many nonprofit organizations.

But despite these arguments, the public seems to like paying off the debt. Part of the reason may have been the arguments of Ross Perot who, when we had a rising deficit, got a lot of people on his side by complaining that politicians wouldn’t live within their means. That, of course, meant that they should vote for Perot.

But a deeper reason, I suspect, is that people think of the government just as they think of themselves. For them, it is an accomplishment to be debt-free. When they pay off the mortgage, they celebrate. (I did, and it was a wonderful feeling.) I sympathize with the public. My father thought personal debt was a cardinal sin, but he couldn’t have run his little auto garage in the middle of the Depression without taking it on.

But governments, like businesses, are different from individuals in that the former are enterprises without personal qualities or vulnerabilities, while people are, well, people. To my father, I think, a person up to his knees in debt was shameful, while his little garage, up to its knees in debt, was just a business problem. That distinction is evaporating as more and more people go recklessly into debt and then declare bankruptcy. We are watching the redistribution of stigma: It is increasingly easy for people to accept their own debts while it’s harder for them to accept the debt of government.

If there is to be a surplus (and I think it will exist, though I attach doubt to its magnitude), the best ways to spend it, aside from keeping up with the rising costs of government services, is to devote part to solving our underfunded social debt (Social Security and Medicare) and part to lowering marginal tax rates. Cutting taxes by a total of $1 trillion over the next 10 years will do more to improve the lives of Americans than cutting the national debt by the same amount.