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 of GNP.

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 about.

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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