Friday, December 15, 2017
Opinion

We need to build in a hurry

Our national hysteria over the debt is distracting us from important investment decisions essential for economic growth. President Barack Obama and Congress are on the verge of a "grand bargain" that will limit investment in national assets at a time when we need investment spending to upgrade the nation's deteriorated state of physical and human capital. • With the cost of money virtually zero, this is a perfect time to invest in our essential productive assets — bridges, roads, broadband Internet, K-12 and math education. In doing so, otherwise unemployed resources become employed, our anemic recovery from the Great Recession receives a boost, economic growth is stimulated, and our ability to pay down the national debt is enhanced.

Both major parties fully understand the importance of capital spending to stimulate a sluggish economy. When either holds the White House during a recession, they are quick to propose increases in government capital spending to improve economic conditions. It is astounding that both parties are now preparing to negotiate a "grand bargain" that includes reduced spending while clearly knowing that it will slow the recovery and actually reduce the ability to control the debt.

Many argue that a policy of fiscal austerity is called for at this time, usually citing scary numbers to describe the nation's indebtedness. It is not uncommon to read that the national debt is now equal to roughly $16 trillion, or approximately one year of national income. This may be a great headline, but it is a meaningless comparison. It would be similar to comparing the entire face value of a home mortgage to one year of family income, when the correct measure of a family's ability to afford a house would be a comparison of the annual principal and interest payments to their annual income.

As with the typical home mortgage, the national debt is not large compared to our ability to make these annual payments, and just as the family enjoys the house, the nation enjoys the assets bought with that borrowed money. However, if the "grand bargain" under consideration should reduce investment in growth-enhancing assets, it will also reduce the growth of future income and with it our ability to pay our debts. Some bargain.

The scariest debt figure available was offered recently by Chris Cox and Bill Archer recently in the Wall Street Journal. They assert that total national indebtedness, including future liabilities for existing programs such as Social Security and Medicare, is $86 trillion.

While offering this nightmarish number — more than five times higher than the national debt — they neglect to specify the time period over which the $86 trillion would be incurred, thus failing to distinguish between debt already accumulated and future debt that will be incurred if current policy remains unchanged. Moreover, without specifying a time period, we cannot tell if the $86 trillion is a giant debt number virtually impossible to pay off, or if it is something quite manageable. Fortunately, we can apply arithmetic to their number to gain some perspective.

By specifying a 75-year time horizon, common for such projections, and assuming a very modest 2 percent economic growth rate, our economy would produce a total national income of $2.78 quadrillion over this period. (One quadrillion equals one thousand trillion.) The Cox-Archer figure of $86 trillion is only 3.1 percent of this number.

Because this debt percentage is so small, rational global investors are not in a panic and are not demanding the higher interest rates currently required of Ireland and Greece. This is not an excuse for complacency, but simply proof that our debt problem is manageable. We have the ability to invest in neglected capital to enhance both our growth rates and our ability to pay both past and projected debt.

More arithmetic: Suppose by intelligent borrowing and investing, the nation manages to increase its economic growth rate from 2.0 percent to 2.1 percent. Over those 75 years that small increase in growth would produce an additional $133 trillion of national income — much larger than the worrisome $86 trillion figure.

Growth is the key to paying off debt. Conversely, failure to invest in growth-oriented spending denies this kind of giant win. If the "grand bargain" results in failure to invest, future generations will have a smaller capital base to work with, resulting in needlessly reduced productivity and lower incomes. That would be a truly "grand burden."

William L. Holahan, top left, is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, below left, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.

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