The economy this autumn is still growing, inflation is low, unemployment is down. Whether this proves the success of supply-side economics or is just another deficit-driven Keynesian recovery will be argued for years to come. It seems to me clear that the enormous federal budget deficit was largely responsible for the recovery and that it could become extremely dangerous if it is not controlled. The important question now is how the recovery can be sustained in view of all the urgent financial problems facing the economy. These include the record domestic budget deficit and the record deficit in the balance of trade; they also include a national debt that will soon amount to $2 trillion and a third world debt that will soon amount to $1 trillion. In effect, we are now borrowing heavily from our children to finance a great many expenditures we really cannot afford. This is neither moral nor prudent.
Will the current growth of the economy eliminate these deficits? Those who believe that it will might recall that the most important rule in business is never to bet the entire company. By betting so heavily on growth, we are running the risk of having our national debt over-whelm the federal budget. Financing that debt threatens to absorb far too much capital needed for investment in the domestic economy if it is to sustain growth, improve its comparatively low rate of productivity, and compete successfully abroad.
The Congressional Budget Office has estimated that by 1989—even assuming an average real growth rate of 4 percent between 1983 and 1989—the national debt will amount to almost 50 percent of GNP, up from 35 percent in 1983. Interest on the national debt will be 16 percent of the budget and it will be growing swiftly. To pay that interest, a government would have to make a grim choice: either to cut social programs and the military budget beyond anything now contemplated or to increase taxes constantly.
It has been argued that the level of the debt need not cause concern because, in 1960, the national debt stood at close to 50 percent of GNP. Important differences, however, exist between 1960 and today. First, more and more of our debt is now financed from abroad (last year about $80 billion), a situation unlike that of 1960. We are therefore at the mercy of foreign investors who, should they lose confidence in the US economy, could create a dollar crisis and higher interest rates in short order. Without the additional capital available from abroad, our low rate of national savings would not be sufficient to accommodate the foreseeable needs of both government and private business.
Two other differences from the economic situation in 1960 are instructive now. The 1960 debt was the result of borrowing during World War II and the Korean War; and the budget deficits between 1960 and 1965 hovered between zero and 1.3 percent of GNP. A rapidly growing economy in the 1960s kept the deficit …