Is the National Debt a National Liability?

Several weeks after partial government shutdown, President and Congress are still haggling over the best fiscal policy the government should embrace to face the third millennium. The central issue among Washington politicians is on the extend government spending and tax relief should be reduced to control the ever-increasing deficit. Though each party is blaming the other for irresponsible government administration, the budget crisis is not new to this or the last decade, but, has been a trend which took fast pace since the 1940's. Back then, the national debt stood at 42.7 billion dollars. It jumped considerably during to wars. Today the national debt are in the trillions and still growing as each second ticks. But, regardless of these numbers, experts disagree on the consequences and long-term effects the national debt has on the American economy. Professor of political economics Benjamin M. Friedman, however, find the current deficits are an outgrowth of the Reagan administration and a real problem for the American future. I believe deficits encumber economic growth. For editor Bartley,the deficit is not a reliable indicator of national economical performance. To begin with, the fear that increasing deficits will slow productivity is unfounded. In fact, as shown by previous figures, no correlation exist between deficits and interest rates. For instance, back in 1981 when the deficit was a 2.6 percent; but in 1986, while the deficit had increased to 5.3 of GNP, the lowest interest rate was 7.25 percent. This means that productivity, which depends on money with low interest rates for investment, is not affected by higher deficits. Likewise, the way the government spending is computed mingle two expenditures which should be accounted for differently. As families or corporations do not deduct total borrowing for capital items in their annual budgets but, instead account only for the regular payments on the debt. The federal government should not consider as part of its operative budget capital that has been invested in assets such as parks, highways and airplanes. In other words, the government deficit is overrepresented because capital spending should not be part of its annual operative budget. Government programs are part of the operative budget, and among them, it is the enormous and ill-planned financing of the social security system which has been responsible for the rising deficit. Under the current system, the amount workers pay in social security is disproportionally low compared with the benefits they receive after retirement. This is happening because future wages on which benefits are estimated are always higher. To reduce this onerous burden, income taxes should be cut to spur economic growth which along with low inflation would give the government more revenues to pay its social liabilities. Though social security and the national debt represent the biggest liabilities to liquidate, it is the social security system which represents the "burden we are living our children," because unlike the annual deficits, the social insurance was suppose to pay for itself. for this reason the real remedy to the deficit is to reduce the benefits to retirees. More than mere balancing of numbers, the deficit needs someone to take responsibility and control for government spending. The executive had that role until 1974, when Congress took away the power of impediment from the President. The item veto would re-establish spending responsibility in one person and would allow the President to expunge unnecessary or special interest outlays from the budget. If politicians want to control the budget, they should stop making it a partisan issues on each election and instead let the free enterprise system work, keep government spending to fundamentals, and reduce taxes and regulation. Professor Friedman, disagrees with Bartley's assumptions. He believes the fiscal policy adopted during Reagan's administration is threatening not only the standard of living and optimistic character of Americans, but, also their children's future. Before President Reagan, the national debt has rose faster than the country's income only during the Great Depression and in time of war. The heavy military spending done by his administration increased government borrowing year after year, leaving businesses and industries without money for capital investment. President Reagan, tried to patch up this hole left by his international policy by bringing into play his supply-side economics. the theory hold that cutting personal and corporate taxes would produce more tax revenues because businesses and individuals would produce and consume more. Reaganomics, however, did not balance tax revenues as expected. The economic policies adopted by the Reagan administration have also lowered the standard of living by increasing consumption at the expense of investment. Government deficits have been taking three-fourths from the net private savings, leaving businesses without money to invest in new, cost-efficient machinery and technological research. This low productivity has been continuous since 1979, averaging just 1.1 percent each year; an amount so low that it soon could do no more than pay the ever increasing foreign debt. Though it just amounts to half of the total debt, the foreign debt represents a greater threat to the American economy because creditors are arranging their debt by taking American property instead of their cash money. In other words, Americans are selling their land to foreigners and living on the proceeds. As a result of the big national debt, Americans are losing confidence in their government and future. Economic prosperity has been a fact throughout the whole existence of the nation; it has contributed to the American ideals of openness, tolerance, and freedom. Economic hardship makes persons apprehensive and creates constant conflicts that undermine the relation between the government and its people. It was probably this apprehensiveness which made us aware of the most dangerous legacy left by the Reagan administration: the mortgage on our children's future. Budget deficits take money which is spent today and paid tomorrow by our children. The non-traditional, irresponsible policies brought by President Reagan, should be changed by taking two actions: First, instead of using private savings to finance government deficits, those resources should be invested in productive capital to increase productivity. And second, new fiscal policies should strive to reduce the huge national debt left by past administrations. These changes would require painful sacrifices, of course; either in the form of higher taxes or lower levels of private and public consumption. I believe the debt takes away from the private sector, money for capital investment that increase productivity and lower unemployment and inflation. The long-held strategy of using deficits to push the economy away from recessions, an a outgrowth of Keynesian economics, has obviously not produced its central goal of zeroing out the initial debt with the increased revenues collected from overspending. Though government heavy spending could temporarily grease the economic wheels by generating employment, overspending creates just mirages in the economy because, basically, government projects generates public services which sell at low prices. Moreover, when the government borrows money for spending, what it is in fact doing is redistributing wealth by giving from the rich to the poor, in the form of employment, and forcing all taxpayers to pay for the transaction, represented, in the interests on the debt. Given the unreliability of macroeconomic policies, one can imagine they are still used by politicians to avoid tasking their re-election with unpopular tax hikes. Though President Reagan, chose the micro-focus of supply-side economics, he thwarted the benefits of this new policy by injecting just money from tax breaks and by borrowing, meanwhile, huge amounts for his obsessed military spending. In fact, budget deficits triple during his administration, and the implemented tax cuts did not increase revenues as expected. President Reagan did not accomplished its objective because of a concomitant flaw in his fiscal policy. That is, the more the government borrows, the greater the percentage of the budget committed to interest payments. Thus, while in 1975 the amount of total spending paid in interest on the debt was 9 percent, in 1993 it had grown to 15 percent. If the national debt continues unchecked, interest payment would take 100 percent of government outlays in the next century. Estimates show that without changes today's budget deficit of 2.5 percent of (GNP) could reach 15 percent by the 2010 and double again ten years later. Besides taking a big chunk of the government budget to pay for their interests, deficits also slow the rate of economic growth by increasing the demand of money. If there are less money to borrow, interest rates for all borrowers may rise. But with high interest rates, industries spend less on the capital goods necessary to increase production. Likewise, government deficits have taken away $5 trillion which could have been used in the stock market to expand the economy. It is the stock market which provides the money for new enterprises, for industrial innovation, and for technological research. Admittedly, unrestrained social spending has also contributed to the fiscal mismanagement of the nation. Spending for the elderly, for instance--dominated by social security and Medicare, now takes a third of all government outlays and will increase as the generation ages. Entitlement programs are problematic because their budgetary ceiling are always higher due to new recipients and automatic cost-of-living adjustment. They have to be changed. To prevent future downturns in the economy, the budget must be balanced by overhauling entitlement programs, reducing military spending, and increasing (GNP). All these reforms would allow the government to collect more revenues. GNP, can be incremented by improving the quality of capital equipment, the training of workers, and management techniques. Additionally, private and public resources should be systematically allocated to make profitable industries more competitive in the world market. Finally, taxes on corporate, stocks, and personal income should be reduced to encourage the private sector to invest heavily on the American economic expansion.