Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, August 29, 1993 TAG: 9312170267
SECTION: EDITORIAL PAGE: D3 EDITION: METRO
SOURCE: DON M. CHANCE
DATELINE: LENGTH: Medium
First, the national debt is indeed $4 trillion. Just in case you haven't heard, at a rate of $1 per second it would take 32,000 years to count to 1 trillion. In the 1992 fiscal year, the deficit was about $290 billion, which was 27 percent of revenues. On the surface, we appear to be in deep trouble.
But that is only one side of the picture. Consider how we would view a business that appears to be deeply in dept.
The Walt Disney Co. owes $6.1 billion or about $11 per shareholder. Do its stockholders feel poor? Is Disney bankrupt?
We have to look at the size of the assets backing the debt, and the productivity of those assets. The company is worth more than $21 billion or almost three and a half times its debt. Its 1992 revenues were $7.5 billion and its profits were more than $800 million. By almost any standard, it is considered an extremely healthy and profitable company.
A similar line of reasoning can be applied to our economy, a collection of households, governments and businesses. In fact,the federal government should be viewed only as the policy-making, politico-administrative body that taxes, borrows and spends a portion of our national wealth. If we are to accept the fact that this debt is a national burden, then we ought to also look at our national assets and their productivity.
The gross national product was almost $6 trillion in 1992. And the gross national product is just the national output in a given year, while the national debt is an accumulation of years of deficits. How large is the national wealth? That is difficult to measure but one source puts U. S. household wealth at about $10 trillion. This does not even include the assets held by the federal and state governments. Thus, our debt is less than 40 percent of our assets, which is a reasonable number for a healthy corporation.
Moreover, most of the debt is not really debt at all, because we owe it to ourselves. The government itself, through the Treasury, the Social Security Administration and other agencies, holds about 25 percent of the debt issues. The Federal Reserve holds about 7 percent of the national debt. While the Fed is not exactly a federal agency, it is a de facto agency in the sense that it operates as a national institution in the best interests of the economy.
Thus, the government itself essentially holds about a third of the debt, meaning that one-third of that huge annual interest bill goes right back to the government. And when those bonds are paid off, the government will be paying itself. Is this really debt? Of course not.
American citizens, state and local governments, and businesses hold about 56 percent of the federal debt. Is this really debt? No. We owe it to ourselves.
So what is all this business about the burden on future generations? If we hold our own debt, do we burden our children and grandchildren? Of course not.
If the economy expands, our future generations will buy the debt. The debt we have to worry about is the 12 percent held by foreigners. But that figure has actually fallen slightly since 1980.
Still, we should not be cavalier about our government issuing debt. When the government borrows heavily, it places a burden on interest rates, sometimes crowding out private borrowers and choking off innovation and investment.
A dollar borrowed and spent by government is far less efficient and stimulative than a dollar borrowed and invested by a business. Fiscal irresponsibility means that our government operates inefficiently and wastes resources.
Thus, we should not ignore the deficit but should guard heavily against its expansion relative to gross national product and national wealth. We should monitor how much of our debt is held by foreigners, as a rising number is symptomatic of an economy that is not expanding at a sufficien trate to finance itself. We should be mindful of the deficit's effect on interest rates and the ability of private borrowers to obtain low-cost funding. However, this preoccupation with the sheer size of the deficit and the accumulated national debt is focusing only on one side of our nation's balance sheet.
In front of a building in New York City is a digital counter that shows the per-capita national debt. Someone should erect another counter across the street showing our national wealth.
\ Don M. Chance is professor of finance at the R. B. Pamplin College of Business at Virginia Tech.
by CNB