August 29, 2004


Rethinking red ink (Sophie Roell, August 29, 2004, Boston Globe)

IN LATE 2002, on the eve of the Bush administration's second round of massive tax cuts, Dick Cheney shocked deficit-wary Paul O'Neill, then the treasury secretary, by declaring that "Reagan proved deficits don't matter." Since Cheney's comment came to light earlier this year in Ron Suskind's book "The Price of Loyalty," administration officials have been vigorously back-pedalling, reassuring voters that deficits do matter - and that those projected for the next decade aren't nearly as large as some predict.

While Cheney's quip is unlikely to be repeated at this week's Republican National Convention in New York, some economists and political scientists say that the vice president may have had more of a point than he realized. Today, the view that large deficits are a "fiscal cancer that will erode any recovery and threaten the prospect of lasting prosperity" (as John Kerry said of the Bush deficits earlier this year) has become conventional wisdom in both parties. But deficits, some scholars argue, are not always a bad thing. In fact, they have often played an important role in advancing and solidifying democracy - and today may be a long-term political boon to the right.

In his recent book A Free Nation Deep in Debt: The Financial Roots of Democracy, the Oxford-based historian James Macdonald argues that debt and liberty have been powerfully intertwined since the 18th century.

Indeed, every student of British history knows that the development of a national debt in England after the Glorious Revolution of 1688 played an important part in bringing political stability to the country. And on these shores, Alexander Hamilton, the first secretary of the treasury, argued against Thomas Jefferson and others that a debt could be a "national blessing" and "a powerful cement" to the nation. "A national debt attaches many citizens to the government who by their numbers, wealth and influence, contribute more perhaps to its preservation than a body of soldiers," he wrote.

Macdonald argues that debt has also played a critical role in the triumph of democracy over authoritarianism. Thanks to their more trusting relationship with the creditors - their own citizens - democracies can borrow vast sums of money extremely cheaply and so gain an advantage in war over more despotic regimes. In 1815, for example, when England defeated Napoleon, England's debt-to-GNP ratio stood at 300 percent - far above the 65 percent that precipitated the fall of the French monarchy in 1789.

America's current national debt of $7.34 trillion, or around 60 percent of GDP, Macdonald writes, falls far short of the debt incurred by Britain between 1760 and 1860, which never fell below 100 percent of GDP. "Simplistic notions that national power and national debt are mutually incompatible are disproved by this single historical fact," he concludes.

It's certainly possible to make a coherent argument that we should try to lower our debt--if for no other than moral reasons--but it's impossible to make a sensible argument that we should have no debt and pretty hard to make one that the current level of debt, or any level we're likely to arrive at over the next few decades, matters much to our standing as the global hyperpower. Indeed, if you track the level of debt for Great Britain and America it seems to peak at those moments when our respective military/geopolitical powers have peaked, suggesting that the former may be at least an effect and possibly a cause of the latter.


Posted by Orrin Judd at August 29, 2004 4:32 PM

Out of interest, do you have the figure for australia?

Posted by: Amos at August 29, 2004 7:39 PM

Time to pull out that Macaulay quote again, Mr. Judd.

Posted by: Matt Murphy at August 29, 2004 9:37 PM

So we're in the same ballpark with the decaying socialist states of Europe and Japan? That's a good thing?

Noone is saying that we should never have any debt. And noone is arguing that we cannot recover from the debt levels that we currently are at. But recovery assumes that we do something to lower our debt. Like cut spending and even, in the last resort, raise taxes.

I applaud the tax cuts of Bush's first term, but not his total absence of initiative on the spending front. We're breeding a careless, laxidaisical "deficits don't matter" attitude which lets people think that they can borrow limitlessly to fund current prosperity without accountability for the future effects.

Posted by: Robert Duquette at August 29, 2004 10:07 PM


Deficits don't matter.

Posted by: oj at August 29, 2004 11:25 PM

Yes, but that percentage of debt doesn't account for all of our unfunded liabilities. It's to OJ's credit that he's thinking ahead of minimizing it, although I have considerable doubts about privatizing everything when the average American doesn't understand any of the basics of finance. I wonder what Argentina's debt to GNP is.

Posted by: Chris Durnell at August 30, 2004 12:54 AM

Reagan's deficits do not appear to have mattered, but how do you account for a counterexample: the malaise of the 70's following LBJ's guns & butter deficit spending of the late 60's?

Posted by: jd watson at August 30, 2004 1:24 AM

Once More into the Breach. I think I have written about this before. The article and the chart are based on the "gross" federal debt. The economic measure that the CBO and the OMB focus on is the federal debt held by the public. Read Chapter 15 of the 2005 Budget. By that measure the deficit is a mere 36% of GDP.

The diference between the gross debt and the debt held by the public is the dedt held by Social security and other federal trust funds. However, the size of that debt is much less than the currently estimated actuarial shortfalls in Social Security and medicare, etc.

As to JD Watson's question. Looking at the CBO historical data, I am tempted to say that the issue from that era was not the size of the deficit, but excesivly high taxes and bad Federal Reserve policy.

Posted by: Robert Schwartz at August 30, 2004 1:54 AM


Inflation. We're in a deflationary cycle now.

Posted by: oj at August 30, 2004 7:09 AM


Add in the unfunded mandates and subtract from net worth and we still have a couple trillion left over. We have no debt.

Posted by: oj at August 30, 2004 7:11 AM

What would the deficit comparisons look like if we excluded military spending by all nations?

Posted by: genecis at August 30, 2004 12:03 PM

Mr Schwartz, all debt is "held by the public". Who owns the Social Security obligations, if not the public?

Posted by: Robert Duquette at August 30, 2004 2:58 PM