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Buddy, can you spare a dime? TECHNICALLY, EVERY AMERICAN OWES $31,000 TO THE NATIONAL DEBT, WHICH CONTINUES TO GROW

July 6, 2008 12:16 am

NEW YORK--

A depression is a long and deep economic recession, many consecutive quarters of decreased aggregate output (commonly measured by GDP), adjusted for prices and the number of people living in the country. High levels of unemployment, increased burdens on borrowers, and social unrest are the boon companions of depression. America has suffered through several depressions, including most recently the Great Depression of 1929-1933. That depression had many causes, some of which, like severe disruption of financial markets amidst a period of profound structural economic change, are eerily familiar to recent events.

Optimists counter that the Federal Reserve has much more depression-fighting power today than in 1929 because it is no longer fettered by the gold standard and because it better understands its role as lender of last resort. That's right, but optimists forget that the Federal Reserve today faces a more fearsome foe than the gold standard.

America's national debt, which in 1999 the government projected would be completely paid off by 2008, has swelled to literally astronomical proportions. The U.S. Treasury now owes holders of its bonds almost $9.4 trillion, or 6,300 miles of $100 bills. That is $31,000 per American, twice the per capita national debt of Canada. It's also two-thirds of U.S. GDP, less than the level reached at the end of World War II, but twice what it was after the American Revolution, the Civil War, and World War I. About 10 cents of every tax dollar goes to interest for bondholders, many of whom are foreigners like the communist government of China. The debt grows larger every day the federal budget remains in deficit.

AN EVEN BIGGER THREAT

David M. Walker, former comptroller general of the United States and the most important person most Americans have never heard of, has for years issued warnings about the ballooning debt. As president and CEO of the Peter G. Peterson Foundation, he hopes to draw Americans' attention to the country's fiscal plight, explaining that entitlement benefits like Social Security and Medicare are even larger obligations than the national debt, and pose a serious threat to our children's and grandchildren's economic well-being.

Debt threatens the current generation, too, because it inhibits the Federal Reserve's ability to act as a lender of last resort, a role it has played admirably to date. Were another crisis to strike, however, the Fed would not be available for an encore. For fear of sparking inflation, it could not again bolster confidence by significantly lowering interest rates. Inflation is a problem because when it rears its ugly head interest rates increase, whether the Fed likes it or not.

Higher interest rates are bad because they dampen business investment and threaten the government's solvency. Given the short maturity of the national debt, high interest rates would considerably raise the Treasury's cost of borrowing as it refinances the trillions of dollars of bonds falling due each year with fresh loans. We could soon find two dimes or a quarter of our tax dollar going solely to pay interest on the national debt. The already weak greenback would swiftly fall to new lows, perhaps importing inflation from abroad.

THE FALL GUY OR PARTY

Which party will take the fall for raising taxes to pay China or other foreign bondholders? For presiding over the first depression since the 1930s or the worst stagflation (simultaneous economic stagnation and inflation) since the 1970s? The apparent strategy of the Democratic Party to lose the 2008 presidential election may be a smart one in the long term.

An even smarter strategy, one that would help the American people much more, would be a bold plan of tax and expenditure reform. The national government needs to increase revenues without making it hurt, which is best done by simplifying the tax code. As for expenditures, the government needs to stop subsidizing business. If Amtrak can't go it alone, sell it to people who can run it profitably. What folly to pay farmers not to grow when food prices are at historic highs, food riots are breaking out globally, and the U.S. needs as many exports as possible to close its massive trade deficit!

Instead of subsidizing ethanol, the government should slap a gradually increasing carbon tax on gasoline and other fossil fuels and let the market decide which alternative energy sources are the best replacements. Then it should eliminate pork projects, reform the wasteful construction, education, health care, and real estate conveyance systems, and fix our half-broken marital institution, the hidden costs of which are enormous.

LOOK AT HISTORY

That's a challenging mandate, but America has faced much tougher problems in the past and prevailed. After the Revolution, the American economy was in shambles, the government bankrupt, and politicians a pack of money-grubbing grubs. A flurry of political and financial reforms in the late 1780s and early 1790s changed everything, putting the nation on the path of prosperity. By the mid-1830s, the government managed to pay off the national debt for the first--and hopefully not the last--time. It all happened because the American people wanted it to, and made sure it did by electing quality statesmen to office, then holding them accountable for their actions as well as their inaction.