March 21, 2001

March 21, 2001 | Commentary on Federal Budget

Out of Tune on the Debt

Can you feel the beat? It's the sound of Washington liberals banging the national-debt drum to drown out the conservative chorus for tax cuts.

"We can't just pass this debt onto our children," House Minority Leader Richard Gephardt, D-Mo., said in response to President Bush's call for tax relief. "Not when we have the ability to pay it off."

Adds Senate Minority Leader Tom Daschle, D-S.D.: "The plan I propose will provide tax cuts for middle-class families and preserve enough of the surplus to responsibly pay down the debt."

It's a catchy beat: Pay off the debt. Ease the burden on the kids and grandkids plus boost savings and economic growth. But it's out of tune with economic reality, because some national debt is actually good for the country. Here's why:

More Than Enough. One problem with paying down the debt while having a budget surplus is that it requires us to keep taxes higher than necessary-and high taxes hurt economic growth more than a national debt. Studies and real-life evidence from the 1920s, '60s and '80s show tax cuts help spur economic growth, as Peter Ferrara of George Mason University notes in a recent issue of Policy Review. But no studies or evidence show paying off the debt helps growth.

Too Much, Too Soon. Liberals say they want to pay off the debt within the next 10 years. But the problem is the government created the debt by issuing Treasury bills, which by law have a set payment schedule that can run as long as 30 years. In other words, no matter how nice it would be to be debt-free by 2011, it can't happen that fast.

Erasing the debt also can affect low inflation, a key part of the 1990s economic boom. The Federal Reserve Board keeps inflation under control partly by buying and selling bonds. It buys the bonds with newly printed money to increase the money supply to create inflation. It sells them to reduce the money supply and keep inflation low. But without some national debt, there would be no bonds to buy or sell. That means the Fed couldn't manage inflation as well-and $8 Big Macs may not be far behind.

Debt? What Debt? The national debt isn't as big as it used to be-or as Gephardt and the Debt Relievers make it sound. Our current $3.4 trillion debt is less than a third of America's gross domestic product (GDP). In 1950, it was 80 percent of GDP, and a little less than half in 1960. America did OK economically back then with those huge debts. It makes little sense now to cry havoc against a smaller debt and refuse to give taxpayers a refund from the surplus they created. (And how ironic that some of the same congressional liberals wailing about the debt today kept quiet during the 1980s and early '90s, when they were spending tax money like rock stars on a wild concert tour.)

Lowering the debt is a good idea-President Bush would reduce it to $818 billion by 2011-but a lower debt shouldn't come before lower taxes.

Of course, if debt alarmists want to lower the debt faster, they always could cut some outdated government programs and make payments with the savings. For example, why not eliminate the Rural Utilities Service, which was created in 1935 to help bring electricity to rural areas? Its mission was largely completed some four decades ago.

But you won't hear that drum beat from Gephardt and the Debt Relievers. On that note, they offer nothing but the sound of silence.

Edwin Feulner is president of The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Distributed nationally by the Associated Press