December 2, 2004


A taxing experience (Thomas Sowell, November 25, 2004, Townhall)

When liberals in the media or in politics start being alarmed about the national debt, it means just one thing: They want higher taxes. The thought of reducing spending would never cross their minds.

As we are endlessly reminded, the federal government's debt has reached record levels during the Bush administration. That enables the liberal media to use their favorite word -- "crisis" -- and adds urgency to doing their favorite thing, raising taxes.

Since we have a larger population than ever and a larger national income than ever, it should hardly be surprising that we also have a larger national debt than ever. But what does it mean?

Donald Trump probably has a bigger debt than I do -- and less reason to worry about it. Debt means nothing unless you compare it to your income or wealth.

How does our national debt today compare to our national income? It is lower than it was a decade ago, during the Clinton administration, when liberals did not seem nearly as panicked as they seem today.

As a percentage of the national income, the national debt today is less than half of what it was in 1950 and about where it was in 1940 -- back in those "earlier and simpler times."

If someone were to produce a political dictionary, "crisis" would be defined as a desire to pass a law and "national debt" would be defined as a desire to raise taxes. And the two in combination would mean a desire to discredit the existing administration.

Speak of the devil in the details.

Posted by Orrin Judd at December 2, 2004 8:34 AM

Moreover, debt stock to national wealth (a figure we do not calculate systematically, but which doubtless has increased along the lines of GDP) would be even more modest.

The proof of the pudding is in the impact "irresponsible" deficits have had on the macro- and micro-economy. At the macro-economic level, it is generally admitted (read any number of Street reports) that an expansionary fiscal policy and a (relatively) loose monetary policy positioned the economy for a solid rebound. Had our fiscal policy been irresponsibly expansionary, the Fed would have not been able to lower interest rates to almost zero. Monetary and fiscal policy were able to complement each other. Textbook.

At the micro-economic level, (corporate) balance sheets have experienced huge deleveraging -- in large part due to a substantial increase in after-tax income. If government deficits had been that irresponsibly high, why have borrowing rates for the private sector (swap rates, A-BB rated debt, e.g.) hardly budge, and at the lower end, drop? Consumer balance sheets have also improved, driven by both a wealth (real estate) and an net-income effect (refinances). Where was the crowding out effect? A pro-business, pro-consumer expansionary fiscal policy helped heal a damaged private sector.

As growth kicks in, actual and projected deficits are coming down. But this is no time to lock in whatever fiscal inefficiencies arose from this expansionary cycle. Starting in 2005, we should begin trimming a lot of b.s. discretionary spending either to build a cushion for the future or to make tax cuts permanent.

Posted by: Moe from NC at December 2, 2004 9:32 AM

It is refreshing to read Sowell, especially when he looks at our debt numbers the same way I've been doing for years.

Posted by: Bart at December 2, 2004 12:00 PM

When liberals in the media or in politics start being alarmed about the national debt, it means just one thing: They want higher taxes.

Ah, Tom Sowell.

Posted by: Paul Cella at December 2, 2004 9:50 PM