DEBT: Concerns Rising : Soaring Debt Stirs Fears for Nation’s Vitality

“If our customers are healthy, we are healthy,” says Erwin Kelen, president of DataMyte Corp. of Minnetonka, Minn., which sells computer control systems for factories in the automobile, aerospace and food businesses.

But Kelen and growing numbers of other Americans fear that nobody will be healthy if the national debt continues to soar.

Most economists agree: As the debt approaches an unprecedented $2 trillion, it is becoming a slow-acting poison that could sap America’s economic vitality. The United States, they believe, is behaving like a free-spending consumer with a wallet full of credit cards who is enjoying the good life while going deeper and deeper into debt.

Cut in Living Standard

“A person can do it for a year or two without serious problems,” says economist Leon Taub. “A country like the U.S. with a strong economic base can enjoy things for another five years and maybe 10 years.”

But ultimately, says Taub, a consulting economist with Chase Econometrics, “we must cut our standard of living to repay our debts.”

Kelen fears that even DataMyte’s high-tech niche in the economy will be vulnerable as the debt drains wealth away from his customers--and ultimately from him. He fears it will become prohibitively expensive to borrow the money his company needs to modernize and grow--and create jobs for more workers. In the computer business, Kelen says, “what we sell is innovation,” and borrowing makes it possible.

And if manufacturing firms can’t afford to borrow, they won’t buy DataMyte machines. “Even smokestack industries have to buy computers,” Kelen observes.

A Commonplace Ritual

Congressional jockeying over raising the debt ceiling has become a commonplace ritual in recent years. It is the economic consequences of the debt, however, not the political ones, that hang most ominously over the nation. And as long as deficits on the order of $200 billion a year continue to feed the debt, those consequences will get worse instead of better.

To maintain its pace of excess spending, experts warn, the federal government will gorge itself on borrowed funds--money saved and invested not only by Americans but also by foreigners. The federal government, as the borrower who always goes to the head of the line, will muscle aside businesses and consumers seeking loans. As government and private borrowers compete for funds, interest rates will rise--discouraging investment in new machines and factories and blunting consumers’ appetites for new homes and cars.

This nightmare, which has been hovering over the economy since budget deficits reached record levels in 1983, has not come true yet. Already, the total savings of individual American citizens and businesses is too small to cover the borrowing needs of the government and the private sector. Because the United States offers the most profitable--and safest--place to do business, however, European and Japanese investors are pouring money into this country.

Inflow of Capital

The inflow of foreign capital is preventing the ultimate debt-related disaster--a shortage of available funds. But it is not without cost. The demand for U.S. investments drives up the value of the U.S. currency--the dollar--in relation to other currencies such as the British pound, the West German mark and the Japanese yen.

That makes imports attractively cheap for American buyers and American-made goods prohibitively expensive to sell overseas, draining profits from U.S. firms and taking jobs from U.S. workers. The governments of the United States and four of its major trading partners have begun intervening in international currency markets in an effort to drive down the value of the dollar.

Besides generating a trade crisis, the burgeoning federal debt also squeezes the activities of the government itself. As interest payments take an ever-growing share of the federal budget, other programs, from building highways to buying jet fighters, inevitably suffer.

Interest payments already have hit $130 billion this year, about 14% of federal spending. These outlays are about twice what the federal government spends for unemployment insurance payments, food stamps, welfare, student loans, highway construction, veterans pensions and mass transit all combined.

A Maddening Prospect

Debt service could consume 21% of government outlays by the end of the decade if deficits continue to accumulate. For voters and members of Congress alike, the prospect is maddening: Instead of doing things for people, the federal government is increasingly taking money from citizens to pay for past borrowing.

The debt has exploded during Ronald Reagan’s presidency. It took all of the first 192 years of the republic’s history for the national debt to reach $1 trillion. It is taking just five more years to double that unimaginable number: At its current pace, the national debt will reach $2 trillion by next fall.

Reagan’s 1981 tax cuts reversed the previous decade’s slow but steady growth of government revenues as a share of the nation’s economy. “A large part of the deficit was a rearrangement of savings, taking money from the government and giving it to businesses and individuals,” says Joseph Carson, an economist with Merrill Lynch, Pierce, Fenner & Smith.

Spending Kept Climbing

But despite domestic spending cuts enacted in 1981, government spending kept climbing at a steady pace. So debt is now accumulating faster than the economy is growing.

As the debt spirals ever upward, so do interest payments on the debt. Interest payments are now growing faster than any other category of federal spending. Debt builds upon debt.

“A household in that kind of fix can eventually declare bankruptcy,” Rudolph G. Penner, director of the Congressional Budget Office, told the House Budget Committee recently. “You don’t hear of countries doing that. Instead, they print money--as in Bolivia and Israel.” The result in those nations has been runaway inflation.

Most Common Medicine

A prolonged economic slump would aggravate the predicament. The budget deficit typically multiplies during recessions because unemployment insurance and other welfare payments rise while tax revenues decline along with economic activity. And the government’s most common medicine for recession--a tax cut--would make the deficit all the deeper.

All of these dangers are touching off alarms not only in Washington but among businessmen around the nation. Jim Cook, president of L.G. Balfour Co. in Attleboro, Mass., which makes school graduation rings, says increased government borrowing to cover the mounting deficit “will be absorbing money that would have been spent on an automobile for you or a new industrial plant for me.”

The solutions to heading off a credit crunch--cutting federal spending, raising taxes or inflating the money supply--are all distasteful.

Congress “does not want to say no to any existing program for fear of making voters angry,” complains Bill Farley, chairman of Farley Industries, a diversified firm whose products include underwear, boots and automotive parts. He expects “minimal growth” in the domestic economy because of the mounting debt and fears the strong dollar will cause “incredible” increases in imports.

Pumping the Money Supply

Hardly anybody--particularly Reagan--wants to raise taxes. And the third approach--pumping the money supply--is widely regarded as inflationary.

Not everyone shares that belief. Rep. Jack Kemp (R-N.Y.) is a leading proponent of the view that robust economic growth can generate enough new tax revenues to shrink the deficit to manageable proportions. In this view, the Federal Reserve Board should stimulate the economy by keeping the money supply growing vigorously. Because inflation has been relatively low--4% a year or less since 1982--advocates of faster money growth contend that a renewed burst of price increases is unlikely.

While the debate remains unresolved, the country will depend on foreigners to continue channeling money to the United States.

“You can live very well on borrowed money so long as people are willing to lend it to you,” said Penner of the Congressional Budget Office.

But lenders may not always be available. Most economists believe foreign investment portfolios will eventually become saturated with U.S. stocks, bonds, real estate and other forms of investment. And when the foreign money stops flowing in, the U.S. consumption binge could draw to a sudden and painful halt.

President Herbert Hoover defined the problem in an ironic moment: “Blessed are the young, for they shall inherit the national debt.”