Some Republicans and talkers at Fox News say our nation is broke -- which doesn't really explain anything. Nation means a large aggregate of people inhabiting a particular territory. Our nation has a terrible national debt -- in other words the nation's debt -- carried by the nation's government. The government's debt is the nation's debt. That debt at this moment is a little over 15 trillion dollars. That is a terrible amount: equal to the Gross Domestic Product for one year, about one-fifth of the total national assets. (See US Debt Clock.org.) The nation isn't broke but economically it's heavily burdened.
Much of the debt is owed to ourselves -- to people who have invested in bonds and treasury bills and I don't know what else. Wealth distribution matters: a good portion of the liability for the nation as a whole is an asset for those of us who have lent the government money.
Foreigners now hold $4.8 trillion of the U.S. national debt -- a little less than one-third of the debt.
How to reduce the debt? The nation did it in the decades following World War II. In 1945 the national debt was 120% of GDP. By 1981 the debt was reduced to 32.5% of GDP. (chart)
What happened at the end of the war was a huge cut in government spending. Expenditures peaked in 1945 at $92 billion. Spending for 1946 was cut to $55.2 billion and in '47 to $34.5 billion. 1947 was the first year since 1930 that the U.S. had a budget surplus. These were cuts mainly in defense spending. Defense spending in 1945 was 79% of the budget, in 1946 67% and in 1947 40%.
The question is, what can we cut today and how much should we cut? Everybody agrees that we also need economic growth to help pay down the debt. It was economic growth that helped pay down the debt between 1946 and 1981.
There is also the question of investment. It's good business even if your business is in debt to borrow more if your investment is going to produce more income than outgo. Some argue that good investments by government spending will do just that by stimulating the economy. A growing economy, without doubt, produces more revenue for the government and therefore helps in the long run to pay down the debt.
Some are locked into the simplistic idea that borrowing more money when we are in debt is absurd. And some say that stimulus doesn't work as an investment, that it merely takes money from some people and gives it to others. They say that money is best left to the wealthy to invest in job creation. They claim that stimulus spending doesn't work.
How we as individuals and we as a nation spend our money is significant. When times are bad economically, investors take their money out of circulation and layoff or don't hire, and people stop spending. The government can spend the people's money on useful projects that private enterprise has no interest in without government partnership. To claim that private enterprise alone invests in useful projects ignores our experience as a nation.
Government stimulus spending takes money that it not necessarily being invested in job creation or invested in government bonds as people did to help finance World War II. Government stimulus spending takes money from individuals who do what with it: speculate in various financial markets, buy gold, put it under their mattress, send it abroad? Where the nation spends its money determines what we do, and much can be done that will put people to work and increase the circulation of money -- money changing hands -- and the economy growing again.
Copyright © 2011 by Frank E. Smitha. All rights reserved.