The National Debt

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Every President since FDR has accepted the practice of a managed economy, and the national debt has more than quadrupled since World War II.

FOR A CENTURY and a half neither good times nor bad substantially influenced economic policy away from the traditional view dating back to Adam Smith’s Wealth of Nations , which first appeared in 1776. A balanced budget and limited government activity in peacetime were essential to economic stability. Smith had written that once a nation “foresees the facility of borrowing, it dispenses itself from the duty of saving.” Then, in the depths of the Great Depression, Franklin Roosevelt embraced the theory outlined by the British economist John Maynard Keynes, who held that government has an active economic role to play- indeed, that increased spending, even at the expense of an inflated national debt, stimulates the economy and promotes growth. “I expect the approval of Congress and the public for additional appropriations,” the President said in 1938, “if they become necessary to save thousands of American families from dire need.”

BUT EVEN AS Roosevelt called for such spending increases, he was careful not to step on the cherished American ideal of a budget in balance. “We shall soon be reaping the full benefits of those programs,” he promised, “and shall have at the same time a balanced budget that will also include provision for reduction of the public debt.” How long “soon” was he didn’t say. It turned out to be never. Still, the ideal survives to this day in proposals to prohibit deficit financing that crop up in Congress from time to time, in campaign rhetoric of candidates who attack the excesses of big government, and even in the statutory debt limit designed to restrict federal borrowing and, theoretically, forbid federal deficits.

In reality, of course, increases in the debt limit are regularly approved by Congress. Without exception, Roosevelt’s successors have accepted the practice of a managed economy, and the debt has more than quadrupled since World War II. In 1955 an Eisenhower economist acknowledged that “budget policies can help promote the objective of maximum production.” In 1963 a Kennedy tax cut to create “a manageable budgetary deficit” led a newsman to note that the President had entered “Keynes’ wonderful world of color where most of the ink is red.” And in 1971 Richard Nixon proposed a deficit budget and openly admitted, “I am now a Keynesian.” Even the current policies of Ronald Reagan, who no doubt would shun allegiance to the “new economics,” prompted one national business publication to predict that Reaganomics would bring a smile to “the ghost of John Maynard Keynes.”

No doubt the old nineteenth-century fears that a borrowing government could be likened to “rapacious wolves seeking whom they may devour” have subsided. But contemporary economists note that deficits still are associated with “a lack of discipline, with fiscal irresponsibility, with waste and corruption, and even with socialism.” Moreover, the debt becomes increasingly expensive to maintain as interest payments to creditors amount annually to a growing percentage of the gross national product, presently about 3.5 percent. Even more important, most experts agree, deficit spending promotes inflation by adding to the nation’s money supply and boosts interest rates by contributing to increased competition for credit with private investors. As for the current deficit projections, congressional leaders have said that they are “terrifying” and could lead to a “financial collapse.”

THUS THE FLAMES of controversy fueled by Alexander Hamilton two centuries ago still burn; and there are those who continue to echo the antiKeynesian who noted sardonically that in FDR’s administration “no balanced budget is needed but, on the contrary, an ever-increasing public debt is necessary for full employment and prosperity if we are to roll along happily and smoothly. … Every day in every way we will work more—eat more—owe more!”