America IS Fiscally Responsible

I recently talked about the people in the "Debt Doomsday" crowd and their inability to see the federal government's debt and deficits in context. We often hear that government spending is out of control or that the United States is being "fiscally irresponsible." Few, if any, view the national debt as a percentage of total income (GDP). When considered that way, it is near the lowest levels ever in the post-WWII period.

Similarly, when it comes to the deficit, we are never told that as a percentage of GDP it is far lower than what we saw under President Reagan and even smaller than where it was during part of President Clinton's first term. Instead, we are given a bunch of nonsense about deficits choking off economic growth or how the "skyrocketing" deficit will drive up interest rates.

Americaadopts the euro!
The fact of the matter is that the United States has been anything but fiscally irresponsible. On the contrary, America has been so financially responsible that it could qualify for entry into the euro system if it wanted to. And that is no small feat of fiscal conservatism when you consider that the two largest economies of Europe -- Germany and France -- had to be accorded special exemptions because their debt-to-GDP ratio was above the limit.

Government spending now, under President Bush, is much the same as it was under Clinton, when viewed as a percent of the economy (though this ratio is projected to rise by several percentage points over the next few years). It is therefore incorrect to say that government has grown so huge. From the point of view of spending, it simply hasn't.

Why deficits are good
While it's true that the nominal figures have grown, it's a mistake to examine the deficit and debt numbers without some frame of reference. That frame of reference is how big the economy has grown. To ignore the growth in inflows (or the asset side of the balance sheet) gives a totally lopsided view. It's as if you walked into a bank to get a loan and only showed the loan officer a list of your debts. In the real world, the banker would have the sense to also demand to see how much money you made and a list of the assets you owned. When it comes to the government, however, the Debt Doomsday crowd doesn't want you to know about the income and asset side of the balance sheet. All they want you to see is that big, scary debt figure.

If the debt-to-GDP ratio does not convince you that as a nation we are OK, then consider this: Since 1789 our country has only had a few periods when we ran surpluses, and each of those periods preceded a major economic downturn (the 1920s, 1999-2000). In contrast, the periods where we saw the strongest economic growth were when we ran large deficits (1939-1944, 1983, 2001-2003). Why isn't this ever mentioned? Did the near-continuous running of deficits cause America to decay into a third-rate power? Hardly. Deficits have had no impact on our rise to the status of greatest economic power on earth. Well, I take that back; they helped us finance the strong growth that still attracts so much of the world's savings.

Another thing that most people assume is that government surpluses are virtuous. That is flat out wrong. Government is not in business to make a profit, and therefore forcing it to save or run surpluses as a private enterprise or individual would is counterproductive. Just think about it for a second. By definition, a surplus results when the amount that government takes in -- from taxes and borrowing -- is higher than what it spends (in other words, when it siphons off more money and wealth than it pumps out). It is not recycling all or more of those proceeds back into the economy. Surpluses, therefore, drain wealth and savings from the private sector, not the opposite. This was clearly evident during the Clinton surplus years, when private sector net savings started a precipitous decline as the government moved from deficit to surplus.

Now, let's talk about what spending contributes. That's right, not what it takes away but what it contributes. Government spending adds to what we economists call aggregate demand. That simply means it boosts the overall demand for goods and services, which in turn raises economic growth, which then lowers unemployment, raises asset prices and incomes, and along with that, wealth and ... you guessed it, savings!

Beware of fearmongering
That's precisely why all this talk about "leaving a legacy of debt to our children" is such nonsense. It has been estimated that this current generation will inherit more than $20 trillion in wealth from our parents. We would not have been getting so much were it not for the fact that government spending raised economic growth over a generation. Where, then, is this legacy of debt? It's an illusion that has been propagated by misinformed individuals who really have their heads stuck in the old days of fixed exchange rates and the gold standard (but that's for a whole other article).

The fact of the matter is that unless we decide to end the growth policies that have been driving this nation's economy for the past two centuries, we shall be leaving the same or even more riches to our children and our grandchildren than we'll inherit from our parents. It's always been that way -- and it's the reason why all the worries about the Social Security and Medicare "time bomb" are misplaced. Do you realize that those dire forecasts have been around almost since Social Security's inception back in the 1930s? Yet they have never come to pass.

Of course, it doesn't mean we still can't mess it up. Unfortunately, stupid ideas are gaining more and more of a following. Well-known and highly credentialed people are advocating changes that might actually bring on a bust down the road. Policy recommendations that spring forth as a result of deep-seated misconceptions about America's financial position could spur the very debt and payments crises that the Doomsday crowd has been warning about for so long.

When talking about the deficit, John F. Kennedy once said, "To the extent that it does not create inflation, there is no theoretical limit to deficits." More recently, policy makers in Japan proved this by taking that nation from one of the most fiscally conservative countries to one with the largest deficit of any industrialized nation. The result: economic growth finally resumed and long-term interest rates stayed near zero.

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If you're looking to be more fiscally responsible, Mathew Emmert and the Income Investor newsletter team can show you how toget paid to invest. Enjoy a free30-day trialtoday.

Fool contributor Mike Norman is founder and publisher of theEconomic Contrarian Updateand is aFox News Business contributor. He also is a radio show host atBizRadio Network.


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