U.S. borrowing won’t hurt nation’s future generations

The Journal’s editorial cartoon on March 15 — which shows America’s future as a child shackled to federal debt — perpetuates the understandable but mistaken belief that the deficit spending we must do today to escape from recession will cause a big burden on our children.

America borrowed money in order to win World War II and put everyone in the country to work. These wartime deficits led to a gigantic national debt — much larger as a percentage of the economy than the present debt is today. If you listened to today’s politicians, pundits, and even editorial cartoonists you’d think that huge postwar debt would have “crushed future generations” — namely, us!

Our parents were not borrowing from their children (us) back then and we aren’t borrowing from our children now; we are borrowing from each other. The government is borrowing from people today who have money to invest in a safe asset.

Our children’s government will make payments on these debts in the future, but they will make them to our children, who will hold most of the bonds.

In fact, the big wartime debt never hurt the economy in the slightest; the economy boomed. And it never hurt any of us who grew up after the war; we didn’t even notice it. Our government made debt service payments to us and our fellow citizens who owned the savings bonds. The debt, which was never really paid down, shrank to insignificance in the face of extraordinary economic growth that continued until the housing bust of 2007.

It’s true that today we owe about half of our publicly held debt to foreigners, including China. But that just reflects an international economy. Americans own lots of foreign assets, too.

Treasury bonds are only about 20 percent of foreign investments in America; the rest are corporate stocks and bonds, real estate, etc. We have to pay debt service on all those assets, just like payments foreigners make to us, and it doesn’t matter whether the foreign-owned asset is a Treasury bond or a shopping center, it’s all the same to our economy.

The real problem is our continuing trade deficits. We buy about $600 billion more each year from foreigners than they buy from us. That gives them lots of dollars they must invest in the United States, some of them in Treasury bonds. Their accumulation of dollar assets is caused completely by our trade deficits at the moment and has nothing to do with our budget deficits.

In fact, we had big trade deficits in the late 1990s when we had budget surpluses. So long as foreigners have dollars to invest, they will buy U.S. Treasury bonds directly or on the bond market, whether the government is running a deficit, a balanced budget, or a surplus.

The trade deficit has everything to do with China and other countries keeping their currencies undervalued so that their exports are cheap. That is a real problem, and one that both parties can agree to work on.

The biggest issue today is getting our people back to work and ending the terrible harm to American families caused by all this unemployment. This means, in large part, government spending to inject new demand into the economy. It means avoiding drastic cuts in government spending like we’re seeing with the “sequester” and the new Ryan budget proposal. These cuts are guaranteed to make things worse.

As this decade continues, we must experiment with different ways to get American health care spending under control. That will be the key, along with some reasonable tax increases, to reducing deficits in the future, after 2020, when such reductions will be appropriate.

But today, we need more government borrowing and investment to get our economy moving again and get our citizens back to work.

If we let the false belief that this amounts to “burdening our children” prevent us from making those investments now, we will indeed leave our children a much diminished future.