Debt Phobia
Do you suffer from it? Take this test and find out.
Steve Conover
Originally Published on NationalReview.com

Paying down the debt is a good idea, according to the letters to the editor I read every day in the newspapers. So our politicians are about to give us what we've been asking for. A debt-free government looks as if it's just around the corner.

Prudence, however, suggests that - before we irreversibly commit ourselves - we take one last look at the path that we are about to choose. A debt-free government sounds good on its face; but, as usual, the devil is in the details. So let's reflect on those details before we lock down our decision to pay down the debt.

To foster that reflection, I've assembled a pop quiz, below. After you've read the questions and thought about your answers, I'll follow up with the way I would answer each one. If our answers confirm the current euphoria about the prospect of paying down the debt, our path will then be clear. We'll have nothing but a pleasant downhill glide toward a debt-free government.

1. (a) How large is the government's debt to the public?
(b) To whom is the debt owed?

2. (a) What is the debt burden, and how large is it?
(b) How does the current debt burden compare with that in the past?

3. (a) In our nation's history, how many times have we paid down the debt?
(b) What happened in the past when we reduced the debt?

4. (a) How large is the interest on the debt?
(b) To whom does the government pay the interest on the debt?

5. How could we have avoided accumulating today's debt and interest burden?

6. What enables the government to pay down its debt?

7. After the debt is gone, what will the government do with the surplus?

8. What is "fiscal discipline," and how much did it help the 1990s economy?

9. (a) Why do Democrats support paying down the debt?
(b) Why do Republicans support paying down the debt?

10. Why does the public support paying down the debt?

Think about your answers to each of those questions, then compare them with mine (see below). I offer them based on my quarter century of experience in private-sector financial management, and many years of studying and analyzing our government's fiscal-policy debates. Some of the answers are simple, irrefutable facts; others are matters of opinion, and your answers may differ from mine, so judge for yourself, then act accordingly - especially by telling your leaders in Washington about the conclusions you've reached, and what you'd like them to do going forward.

My answers to the Pop Quiz:
1a: How large is the government's debt to the public?
The latest release from the Bureau of the Public Debt states that the government's debt to the public is $3.4 trillion.

1b: To whom is the debt owed?
That's easy. The "government's debt to the public" is owed to the public - you and me.

2a: What is the debt burden, and how large is it?
The "debt burden" is a ratio of the debt level to a number that indicates the borrower's ability to handle the debt - e.g., my own "mortgage burden" is 139% of my annual salary. The best available measure of the government's debt burden is the ratio of debt ($3.4 trillion) to the size of the nation's economy, i.e., to Gross Domestic Product ($10.1 trillion). Therefore, the government's current debt burden is 34%.

2b: How does the current debt burden compare with that in the past?
In Jacksonian times, the debt burden reached 0% for the only time in our history. More recently: After WWII it reached 110%; during the prosperous 1950s, it averaged about 52%; during the 1970s, it hit a short-term low of 25%; in the early 1990s, it hit a short-term peak of 50%.

3a: In our nation's history, how many times have we paid down the debt?
Since 1776, we've made significant reductions in the debt six times. Only once did we eliminate it completely; the other five times we reduced it anywhere from 20% to 60%.

3b: What happened in the past when we reduced the debt?
Since 1776, we've had six depressions or severe economic contractions. For history buffs, those contractions began in 1819, 1837, 1857, 1873, 1893, and 1929. Each of those disasters began during, or immediately following, one of the six periods of debt reduction. We're six-for-six. (Ominously, we have now entered a seventh period of significant debt reduction. Will we go seven-for-seven?)

4a: How large is the interest on the debt?
According to the Bureau of the Public Debt, interest is running close to $360 billion per year.

4b: To whom does the government pay the interest on the debt?
Not surprisingly, the interest on the government's debt to the public is paid to the holders of public debt, i.e., to the bondholders. The government's "interest burden" is a transfer of money from taxpayers to bondholders. Most of us hold T-bonds, directly or indirectly - they back up our savings accounts, insurance policies, mutual funds, and retirement funds. In other words, most bondholders are taxpayers, so most of the interest payments are transfers of money from our left pocket to our right pocket.

5: How could we have avoided accumulating today's debt and interest burden?
Only two ways, or a combination of both: (1) we could have taxed our parents and grandparents at much higher rates than we did; or (2) we could have reduced our spending on such things as ending the Cold War, winning the Gulf War, supporting our seniors with Social Security and Medicare, building interstate highways, launching weather satellites, defending our embassies, fighting terrorism, developing the Internet, or educating returning WWII veterans via the GI Bill - to name just a few.

6: What enables the government to pay down its debt?
Surpluses. Keeping tax receipts higher than spending (or, if you prefer, keeping spending lower than tax receipts).

7: After the debt is gone, what will the government do with the surplus?
To prevent a disastrous deflation of the currency, it would have to purchase private assets from the public - because there would be no more T-bonds left to repurchase. In other words, instead of being a borrower from the public, the government would become an owner of (or a lender to) the public. Alan Greenspan verified this in his testimony on January 25, 2001. (Incidentally, the sociopolitical term for government ownership of private assets is "socialism.")

8: What is "fiscal discipline," and how much did it help the 1990s economy?
"Fiscal discipline" should mean: "Helping the private sector grow the economy." (When the economy grows faster, tax revenues grow right along with it.)

But that's not what it means. Soon after the 1993 tax hike, "fiscal discipline" took on the politically convenient meaning of "deficit reduction" - until 1998, when it metamorphosed to "debt reduction." Deficit reduction didn't cause the economy to grow, any more than melting snow caused the sun to rise. It hasn't helped interest rates, either. Since 1993 the annual deficit has dropped by a half-trillion dollars; but the interest rate on the bellwether 10-year Treasury has risen, not dropped.

So the answer is: "Fiscal discipline" is a code word for "tax hikes" (as is the newly minted "triggers"). Fiscal discipline didn't lower interest rates, but it did reduce the private sector's ability to deliver higher growth. Fiscal discipline slowed but couldn't stop the companies and industries incubated during the Reagan boom; those companies still drove the 90s economic boom. Unfortunately, fiscal discipline - along with its monetary sidekick, inflation-phobia - formed a ball-and-chain that, ultimately, eight years after the tax hike, brought economic growth to a standstill.

9a: Why do Democrats support paying down the debt?
To block the Republicans' agenda of across-the-board tax rate cuts.

9b: Why do Republicans support paying down the debt?
To block the Democrats' agenda of increasing spending.

10: Why does the public support paying down the debt?
This is a mystery to me. The only plausible answer I can muster is that "debt" is a scary, dirty word. But it's still a mystery to me, because the government's debt is the public's asset (T-bonds). Surpluses will reverse that situation by turning the government's debt to the public into the public's debt to the government. Why the public wants that is beyond me.

Those are my answers to the pop quiz. How did they compare with yours? If you still feel exuberant about the prospect of paying down the debt, write your representatives and reinforce their current impulse to do just that. On the other hand, if you feel as uncomfortable as I do about the current obsession with paying down the debt, write or call your representatives and tell them to change course. Tell them we need to increase the size of the tax cut, not reduce it - because debt phobia is a false fear based on a false premise. I've been trying and trying to get this message across, but I need some help. I'm only a single voice. A million voices, or ten million, would be much better. In any case, here's the moral of this quiz: Be careful what you ask for. You just might get it.