RED INK AND HIGH TIDES, FOREVER:

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.

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