Public Enemy #1: The Deficit is SHRINKING TOO FAST

When will we ever learn?  The 9/11 attacks, aside from the tragic cost in human lives, cost our economy a lot of money—in the long run as well as the short run (see this and this).  Would the wars in Afghanistan and Iraq have happened if 9/11 had been prevented by a more effective national security apparatus?  I think so; do you?

Sorry, debt-phobes and green-eyeshades, I will not let this one go.  Let’s set aside the quantifiable dollar cost; let’s think for a minute about the cost in human lives of our failure to prevent 9/11 and the subsequent Hundred Year War.  The late historian Stephen Ambrose had some rhetorical questions that will help focus our thoughts:

When I read the letters from the [WW II] veterans I'm almost always impressed by their brief accounts of what they did with their lives after the war. 

Then I think about those who didn't make it. Of each of them, I wonder, What life was cut off here? A genius? A budding politician? A builder? A teacher? A scholar? A novelist? A musician?

I sometimes think the biggest price we pay for war is what might have been.

Isn’t it obvious that preventing war and destruction is highly desirable and extremely lucrative in the long run—even if we can’t quantify its present value in dollars?  Why do green-eyeshade accountants who write headline-grabbing doomsday papers keep ignoring such important intangibles as preventing attacks and wars? 

The danger of today’s shrinking deficit
Today, tax receipts are growing faster than government spending.  Our economy is growing rapidly enough to outpace the debt growth rate.  That means our debt-to-GDP ratio is shrinking; see the debt clock at the top right of this website: it’s ticking backwards, and that means the debt load is decreasing.

I do not like that condition (a decreasing debt-to-GDP ratio); I’d much prefer federal tax-and-spend policies that hold that ratio constant, at 65% GDP, plus or minus some wiggle room.  Many, many economists, of all ideological persuasions, agree that the ratio of debt to GDP is the key statistic, as opposed to the raw dollars of debt that keeps making all the headlines. 

Why is today’s rapidly shrinking deficit dangerous?  Because it means we are not spending what we could be on improving our national security, i.e., on our ability to prevent future attacks and wars, without increasing our economy’s debt-to-GDP ratio.  Deficit phobia can be fatal.  (It’s the same thing as surplus mania: unnecessary fear of debt.) 

When we are consumed by unnecessary fear of debt, we do stupid things like underfund our national security apparatus.  Remember the mid- and late-1990s?  We cut our national security budget (i.e., we reduced our ability to detect and prevent future attacks and wars) to fund our surpluses.  Result: We didn’t prevent 911, and we didn’t prevent the huge subsequent costs we’ve been incurring since then, tangible and intangible.  Think about it: What if we had spent the late 1990s surplus on a better-equipped, better-organized, better-managed, better-coordinated national security apparatus that had succeeded in thwarting the 911 attacks?  Wouldn’t that have paid for itself many times over by now—and not just in green-eyeshade dollars, but also in human lives? 

When will we ever learn?  Why don’t we freeze our debt-to-GDP goal at 65.0%?  With an economy growing at 7% (nominal), our nominal debt can grow at 7% without moving us off the 65.0% mark.  To freeze it today, we’d have to do one of two things: (a) cut taxes; or (b) increase national security spending.  I strongly prefer (b), partly because I think the current tax take by government—18% GDP—is neither too high nor too low, and partly because I think we are still too vulnerable to deadly asymmetric attacks similar to or worse than 911. 

The green-eyeshades keep harping about “generational equity” as measured by the present dollar value of future liabilities.  Well, here’s what I think: it is highly equitable and benevolent of us to spend more money now to prevent future attacks, wars, death, destruction, and economic calamity.  I wish we had done it in the late 1990s, but we didn’t; we loved our surplus too much.  I certainly hope we don’t repeat that mistake.  So I’ll finish by repeating what I said above:

Sorry, debt-phobes and green-eyeshades, I will not let this one go.  Debt phobia has already cost us way too many lives.  Let’s not repeat that mistake; let’s freeze the debt-to-GDP ratio at 65%, and use the extra spending to improve our national security apparatus even more than we had planned.