Why We Don't Need to Pay Down the National Debt

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This post is part of our forum on Michael Kinsley's October cover story exploring the legacy of the Baby Boomers and what they owe the country. Follow the debate here.

Let me pass over Michael Kinsley's discourse on Boomer character--it didn't appeal to me--and focus on his proposal that we devote our remaining days to paying down the national debt.

Why does he want to do this?

Kinsley doesn't explain. "Numbers are numbing" he yawns. So he invokes the scary scenarios of the Congressional Budget Office (which predict the national debt will reach 185 percent of GDP by 2035), asserting without evidence that the assumptions behind CBO's "Long Term Budget Outlook" are "reasonable." They aren't. Just for instance, CBO assumes that short-term interest rates, now near zero, will rise to 5 percent while inflation stays at 2 percent; this is a big factor in their forecast. But why would a rational Federal Reserve do any such thing? (The full case against the CBO assumptions is here.)

Kinsley writes that all the ways of looking at the national debt "lead to varying degrees of panic." But obviously there is no panic where it matters, among those who lend money to Uncle Sam. Otherwise 30-year Treasury bonds wouldn't be at 3.7 percent, would they? Does Kinsley even know this fact? His essay gives no sign that he does.
Can the Boomers Save America?
And does Kinsley think the idea of reducing the national debt is new? Actually it's been around since the debt itself started growing, around 1790. The only actual effort to pay it off in full, under Andrew Jackson in 1835, was followed by a depression that brought the debt right back. Since 1960, three times our leaders have tried to balance the budget and so reduce the debt. Each time, in 1969, 1980, and again in 2000, guess what happened? Recession. Why? Because running a budget surplus means draining funds from private businesses and families. The textbooks used to call this "fiscal drag." It just isn't smart.

Nor is the present public debt close to being a record. In relation to our annual output it was much higher in 1946--that would be the year after the Greatest Generation won World War II. (Disclosure of a well-known fact: My father had a strong hand in economic management in the war years.) Did calamity follow? No. For a third of a century after the war, the debt-to-output ratio just gradually declined. By 1980 it was too low, which caused some problems. But then Ronald Reagan--who was another Greatest Generation guy, or who at least played one in the movies--came along and fixed that.

It's true that we have got big economic problems right now. But the budget deficit and the public debt aren't among them. Kinsley just assumes they are, adding to the mountain of confusion already piled onto this topic. I hope his response will take up each of these points and rebut them--if he can.

Let's move on to Kinsley's estate tax idea.

The actual and proper function of our estate tax is not mainly to demolish great fortunes. Nor is it to raise revenue for the government. It's to encourage donations to churches, hospitals, universities, and other non-profits. At this the tax has been a spectacular success--not because people pay it but because they mostly don't. Thanks to our system of estate tax socialism, our richest citizens actually participate in civic life, earning honor through charity abetted by tax breaks. And the non-profits they help fund provide about 8 percent of all American jobs.

But for this system to work, the estate tax must impose high rates on great fortunes. Conversely, it should leave ordinary working people alone. Kinsley's proposal--in fact a terrific boon for a few Boomers like Bill Gates--is the exact opposite of what we need.

As for the notion that a "typical" American surviving spouse leaves a cool half-million behind, only someone too lazy to distinguish a mean from a median could believe that. In 2004 according to the Federal Reserve mean family net worth for households with a head aged 65-74 was $690,900--I couldn't find where Kinsley got his $1 million--and the median value was only $190,100. This includes housing wealth, and those values would be lower today. Numbers are numbing, as Kinsley said.

Is intellectual laziness a Boomer vice? I think not. It's a pundit vice, induced by easy access to choice venues for the publication of one's thoughts. The pity of Kinsley's essay is that we Boomers will, in fact, leave problems: for starters we burned the oil and we've warmed the planet. Those are grave matters and Kinsley might have written about them. But no: he chose to waste our time on a topic he hasn't troubled to learn the first thing about.

Unemployment, on the other hand, is a real problem. And there is one way that worn-out Boomers might help with that. That would be to retire. Get out of the workforce. Give up your jobs so that ambitious, harder-working and more capable young people can have them. Go home and enjoy life, spend down your fortunes - or give them away, in full, to a freespending university, hospital, or church. That also would create jobs and incomes--and taxes for the Treasury too.

I'm not referring to anyone in particular, of course.

The debate continues here.

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Presented by

James Galbraith

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.  He holds the Lloyd M. Bentsen, Jr. Chair in Business/Government Relations at The University of Texas at Austin.

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