How Americans can dig out of debt after `voodoo economics'
THE Shelbys are a typical American family of four. Despite all you hear about household disintegration, there still are descendants of ``Leave It To Beaver'' families loose in the land. Only both parents work now. The Shelbys (not their real name) have a mortgage almost one-third paid off. They are nearing the end of a car loan (and, they say, the car). Their other car is paid for. They've got some temporary MasterCard debt. College tuition bills will be starting in six years, an as-yet-unknown but sobering total. The Shelbys have also thoughtlessly rung up another nearly $10,000 in debt for nothing at all. Not for a remodeled kitchen. Not for a third car, or root canal work.Skip to next paragraph
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Well, maybe it's not exactly for nothing at all. They have borrowed the $10,000 over the past six years without really noticing - for taxes cut without reducing federal services. That's the effect of the $955 billion added to the national debt in fiscal years 1982-86, catapulting all of us from $1 trillion to $2 trillion in federal debt.
It's the Shelbys' daughter and son who are going to end up paying back much of the interest and some of the principal on that loan. They will have to pay back interest to foreign lenders. They will have to pay an even bigger price - selling off their ownership of the nation's businesses to foreign buyers. They and most Americans will also have to pay some other costs for this decade of living beyond the national income and borrowing from the rest of the world. They are going to discover that it was not the yuppy generation, but their parents who were the bigger Me Generation in terms of spending and nonsaving. This discovery will occur when they near retirement age. Then they will almost certainly find that, after paying a heavy tax for the social security benefits of their parents' generation, they will either receive lower social security benefits or become eligible at a considerably later age. Even now, all of us are reaping the results of lower investment than normal in more modern plants and equipment. That means less efficiency, lower productivity, less competitiveness - ultimately a lower standard of living until the slippage is corrected.
The national catch-up becomes increasingly costly and difficult as more factories and offices in more countries learn to become more efficient competitors. The United States recovery can, of course, be accomplished. A nation with America's educational, research, and entrepreneurial assets can make major comebacks when its citizens understand a problem and are determined to work on it. But it isn't just going to pop into place when the falling dollar hits bottom for this cycle. President Reagan and Congress need to agree on a genuine (and orderly) deficit-cutting program. It is not yet clear how well that will start, for even one year, as the two branches haggle over cutting the defense budget and raising federal fees or taxes.
Why, you may say at this point, are you telling me about businesses failing to invest enough in modernizing and falling productivity; then talking about the federal government's deficits? Aren't the two in different sectors?
Different sectors, yes. But connected to the same money tree. Just look at some statistics and analysis from Prof. Benjamin Friedman of the Harvard economics department, whose research supplied much of the basis for this column.