There are some troubles in the U.S. economic paradise, and some of them are serious. But they are not the ones attracting most of the rhetoric in financial and certain political circles.
We hear a great deal about the national debt, the budget deficit, the trade deficit, the decline in personal saving, the falling dollar, and the United States becoming "the world's greatest debtor nation." Much of what is said, though, is misleading, based on faulty measures and analysis, and not properly focused on the real issues--the standard of living of the American people, now and in the future.
Going back to the days of Franklin D. Roosevelt, Republicans have been attacking Democrats for running budget deficits. With the huge deficits of the Reagan era, Democrats had a chance to get even. But amid all the finger-pointing, there has been little effort to see just what the issue is all about, how debt and deficits are calculated and how they have really affected the economy. Some of the key facts are eye-opening.
First, debt and deficits are both in mind-boggling figures. The federal debt is now counted in trillions, that is, thousands of billions of dollars, the deficit in hundreds of billions. But the numbers are too large to be meaningful in themselves. They have to be taken in relation to something.
While many attempts to think of government debt in the same terms as one may think of personal debt are misleading, there is one standard common to both. The debt must be viewed in relation to income. If an individual borrows from a bank to buy a house, the key question in deciding on the debt that can be incurred is the individual's income. Clearly, a loan--or debt--of $100,000 is much more in order if income is $50,000 a year than if it is $20,000 a year.
A similar standard is in order for the federal government, but here the appropriate measure of income is the national income or, alternatively, the gross national product that we turn out in earning that income. With this frame of reference, while the federal debt has risen to unprecedented heights, now some $2.5 trillion, it has been much more imposing in the past. At the end of the 1946 fiscal year, the gross federal debt, then $271 billion, was 127 percent of the 1946 gross national product of $212 billion. Successive years of deficits brought the debt to $914 billion by 1980, but that was then only 34 percent of GNP. At present the debt, large as it has become, has risen only to 53 percent of GNP, and the gross federal debt held by the public has, at least for the while, stabilized at 43 percent.
Of course, the country is much larger than it was forty years ago, and there has been inflation. Adjusting for both inflation and population growth, we find that the real federal debt, per capita, fell by about three-quarters from the end of World War II to 1980. While it has risen substantially since 1980, it is still well under the earlier high.
What about those huge budget deficits? Are they not adding to the debt? In principle, yes! Every dollar of deficit adds a dollar to the debt. With the debt at $2,500 billion, another deficit of $200 billion would bring the debt to $2,700 billion. But there are two major qualifications. First, suppose, as is predicted--and
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