PRESIDENT CLINTONS budget has been greeted as deserved. It is a budget designed to give a political face to pleasant thoughts. Such thoughts include free prescription drugs for old people, modest tax reductions for the middle class and the lower class, this and that for this and that, and -- a Major Pleasant Thought of the season -- a reduction in the national debt.
This last is an especially pernicious pleasant thought because it is very appealing to conservatives, and indeed debt reduction has much to commend it. But it does deserve scrutiny.
Is the national debt too large?
A rational amateur would tend to ask some basic questions. The first of these: Is damage being done on account of the size of the debt? Such damage would be visible, for instance, if it became necessary to devalue the dollar. This would be the result of doubt being cast on the credit of the United States. If a country needs to borrow in order to sustain, or to magnify, the deficit incurred by its fiscal practices, then it has to find someone who will lend it the money. Someone has to buy its bonds.
Now the next question to ask: How much interest is being paid for those bonds? Very unstable governments can usually sell bonds, at least in the short term, if they promise a huge return. Not long ago, Mexico was paying out 12 percent and more to anyone who would lend it money. The money poured in, but the malpractices outpaced the subventions, and devaluation came, so steep that bondholders ended up with 1 percent and less, and, of course, a reduction in the bonds face value.
The United States is paying about 6.5 percent on its Treasury bonds, which is a lot more than the traditional 3 percent interest, the conventional orthodox rate of return for a hundred years. But given two generations of inflation, the price is not inordinate. Compared to what? The interest rate is subject to the discipline of capital mobility. Money flows to the market in which returns for its use are the largest. This means a general equality in interest rates, subject only to the stability of the lender. In the international markets, Russia would have to pay about 2 1/2 times as much as the United States.
Next, one looks to the size of the national debt over against national income. A national debt of $1 trillion would instantly bankrupt a majority of the nations on Earth. But $1 trillion is a mere 11 percent of our national income. We have, now, a national debt of $5.7 trillion, which is equal to 63 percent of our national income. That is a heavy debt; but again, one looks for relative figures. In Canada, the debt is about 87 percent of national income; in Japan it is 105 percent.
The above would seem to be telling us that our national debt is not immobilizing the U.S. economy. There are of course many other proofs that were doing OK economically. The U.S. economy is flourishing.
But then there is the question of the burden of annual interest payments on the debt. These amount to approximately $200 billion. Surveying the problem of debt reduction bit by bit: Suppose we were talking about a $100 billion dollar surplus and confront the alternatives of applying it to debt reduction, or returning the money to the taxpayer. Self-evidently, we are talking about the overtaxed taxpayer, since that is why we have a surplus. Tax rates aren't supposed to be motivated by a desire to generate a surplus.
If that $100 billion, at the hands of taxpayers, is going to generate tax revenues larger than the cost of borrowing money, then we are ahead of the game, are we not? Does money returned to taxpayers tend to result in money deployment that generates tax revenue? The answer, quite simply, is yes, unless the whole of it is spent on ice-cream cones and aspirin, which are not taxed.
But then, too, money returned to taxpayers is spent also on capital growth, which not only adds year after year to the revenue of government, but also to the satisfaction of the community. Money spent to develop a housing project satisfies not only local tax collectors, but also people looking for a place to live.
It is a dangerous appeal, that of debt reduction. The reason being that it is axiomatic that human beings should not run into debt, and that those who are in debt should use the proceeds of unexpected revenue to reduce that debt. But people arent governments, whose vices are distinctive, as also their opportunities.
William F. Buckley Jr. is a syndicated columnist.