AD Main Menu

US national debt has its good side

David Reaume

Alaskans should care about the national debt and the deficits that keep it growing because if it is mismanaged, Alaska may catch a cold from lower oil prices, reduced tourism and higher interest rates.

But neither Alaskans nor other Americans need to fear the national debt as if it were some sort of looming catastrophe threatening us, our children and our grandchildren.

Most fear of the national debt is unfounded and more of a threat than the debt itself.

Here is why. The national debt will never be paid off and should never be paid off.

The notion that the national debt places an unfair burden on future generations is largely, not entirely but largely, political hooey! Let me say that again: the U.S. national debt should never be paid off. In fact, a worldwide financial disaster would be triggered if more than a fairly small fraction were ever paid off.

Why should the debt never be paid off? Because businesses and investors all over the world must have a nearly risk-free asset in which to invest in order to counterbalance the more risky assets in which they also invest. U.S. government securities have played that role since 1945. It might happen that some day the world will create a different risk-free asset, but that has not happened yet and is very unlikely to happen for as far out as the eye can see. Without a secure fallback investment to balance portfolios and to turn to when economic conditions deteriorate, the amplitude of cyclical swings in the world economy, the national economy and the Alaska economy would be greatly magnified.

Since 1752 the British government has issued Consols, bonds that are never expected to be paid off. Consols are perpetuities that pay a set rate of interest four times a year. Although they now constitute a very small part of the British government's outstanding debt, they are still around. One can think of the U.S. national debt as made up of Consol-like perpetuities that just happen to be rolled over at set intervals so the interest rate can be recalibrated.

There is, of course, a downside.

The downside to increasing deficits and a rising national debt is that public sector spending "crowds out" more and more private sector investment spending. If you like the idea of Congress and the president playing a growing role in the nation's allocation of resources, then I suppose that should be of little concern. On the other hand, if you think government leaders are far more likely to make bad investment decisions than are private decision-makers, then crowding out is of considerable concern.

But crowding out relates to the size of the national debt and not to the existence of the debt itself. Like almost anything else there is an optimally sized federal deficit and an optimally sized national debt. Given a growing world economy, the optimal size of the U.S. national debt needs to increase because the larger the size of the world's overall asset base, the greater the demand for a secure, nearly risk-free asset.

For my tastes, the multitrillion-dollar deficits projected under the Obama administration for the next eight years are way above optimal. But the fallout will not be in the form of an unfair tax increase on our grandchildren when the associated debt is paid off because, again, it will never be paid off. The fallout will come in an increased drift toward an economy increasingly controlled by the federal government.

Yes, I know, the greater the size of the national debt, the greater the taxes that need to be levied to pay the interest on that debt. So be it. Unless the national economy actually declines for a generation or two, our grandchildren's generation will be richer in the aggregate than we are now, and as long as federal deficits are not too far above optimal, they will be just as able to afford higher taxes as we are to pay those now on the books.

David M. Reaume is a Washington state-based economist who was based for many years in Juneau. His opinion column appears every fourth Sunday.


DAVID REAUME
ECONOMY