February 6, 1990
"Deficits Slowly Poison U.S. Economy"
San Jose Mercury News
By Timothy Taylor
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AFTER suffering through a decade of ominous warnings about how the enormous
federal budget deficits were about to cause financial collapse, recession, depression
and maybe worse, Americans might be forgiven for feeling that many politicians
and commentators have been crying wolf. After all, the U.S. economy has apparently
made it through the 1980s without being paralyzed or traumatized by budget deficits.
But there are two reasons to cry wolf. The reason in the children's story is
that the little boy was bored and wanted attention. However, one might also cry
wolf because you are afraid that nobody will listen if you yell "Possible
long-term pesticide exposure hazard!" or "Slowdown in the long-term
rate of economic growth!"
In the second case, crying wolf is technically inaccurate, but it may draw
attention to a real problem that might otherwise be neglected. Of course, yelling
about an immediate threat when the real danger is long-term and unseen can also
ruin your credibility.
Although the news reports don't mention it, the federal debt burden has actually
leveled off since 1987. The graph below illustrates this fact by showing the single
most revealing statistic about the federal debt: the ratio of accumulated federal
debt to the size of the total economy.
In 1950, the United States was carrying a mountain of debt accumulated to finance
the fighting of World War II. The graph shows how that debt burden declined for
three decades. Even though the United States ran budget deficits during most of
the 1960s and 1970s, the economy grew faster than the debt.
In contrast, the budget deficits of the 1980s were so large that the national
debt grew much faster than the economy. The ratio of debt-to-GNP jumped from 26.3
percent in 1981 to 42.6 percent in 1987.
Even if the $64 billion deficit promised in President Bush's 1991 budget turns
out to consist mainly of optimism and whimsy, the 1991 debt-to-GNP ratio should
be slightly lower than it was in 1987. But the fact that the nation's debt burden
is no longer shooting up doesn't mean that it isn't a problem; government borrowing
is still sopping up too much of the nation's meager savings.
As a consequence, funds for private investment are costly and scarce. According
to information compiled by the Council on Competitiveness, a private group chaired
by Hewlett-Packard's John Young, a business's cost of raising capital in the United
States is 50 to 130 percent higher than in Germany or Japan, depending on the
type of investment. As a result, U.S. investment is about 4.9 percent of GNP;
West Germany's investment is 6.9 percent of GNP; Japanese investment is 15 percent
Even though the U.S. economy grew by about 30 percent in the 1980s (after adjusting
for inflation), the amount of new investment was actually 6 percent lower than
in the 1970s.
Even this low level of investment has only been sustained by an inflow of foreign
money. When the government soaks up so much of the money of American savers and
investors, private business has to turn to foreign investors. Although precise
estimates are not available, U.S. foreign debt now exceeds $500 billion and is
increasing at about $100 billion a year.
By the mid-1990s, U.S. foreign debt may reach $1 trillion. The interest payments
alone on such a debt would be the equivalent of every American family of four
sending $1,000 abroad every year, forever. One way or another, that is bound to
reduce the U.S. standard of living.
Lost productivity and low economic growth are not a matter of wolves at the
door, not a matter of imminent depression or collapse of the stock market. Instead,
they slowly bleed strength from the U.S. economy.
Imagine, for example, that reduced investment and foreign interest payments
accumulated during the 1980s lead to economic growth being one-half of 1 percent
less each year. Over 25 years, that means the economy inherited by the next generation
will be one-eighth poorer than it would otherwise be. To put that proportion in
context, one-eighth of the current $5 trillion GNP would be $625 billion.
Perhaps it is asking too much of the myopic federal government to stop borrowing
so much when its citizens are saving so little. To political pressure groups and
congressmen who focus their attention on this year's budget and the next election,
half a percent off the long-term growth rate may not sound like much to worry
But people and government have learned to be sensitized (or even oversensitized)
to risks of long-term exposure to chemicals, radiation, cholesterol, and so on.
If people would get as concerned about the long-term economic effects of government
deficit as they have about trace amounts of pesticides on their vegetables, there
might be some hope for ending the government's borrowing binge.
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