National Debt: Road to Ruin or Renewal?

When an appalled British journalist described the condition of his country’s finances in 1790, he wrote in dark and pessimistic terms that would be quite familiar to any reader of an American newspaper in the 1990s: Britain’s national debt was of “a sum which the human mind can hardly form an impression. Were it to be laid down in guineas in a line, it would extend upward of four thousand three hundred miles in length.”

The British national debt that year was an unprecedented 272 million pounds, and yet contemporary fears over its consequences on Britain’s standing were badly misplaced. Britain was soon to emerge as the world’s dominant imperial power, the unquestioned master of the Industrial Revolution and of global trade.

Spain, on the other hand, suffered far worse consequences as a result of a similar rise in its national debt. After frittering away the rivers of gold and silver its galleons had brought back from Spanish colonies in the New World, it finally lost control over its finances and fell from great-power status.

The contrasting fiscal experiences of Britain and Spain offer a valuable historical perspective for anyone trying to make sense of the budget debates in Washington in the late 20th century. History shows that it’s not the size of the debt that matters. What matters is how a government spends the money it has borrowed, how it structures and finances its debts and how it pays them off. That is one of the most compelling insights in John Steele Gordon’s slim new book, “Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt.”

*

Gordon argues that in Britain’s case, a well-structured, centrally managed national debt, backed by highly liquid, long-term bonds, allowed London to finance its empire through Europe’s fledgling financial markets. Spain’s debts, on the other hand, were largely short-term personal notes owed by the king to foreign bankers.

Meanwhile, Britain had also begun to get a handle on the revenue side of the ledger, developing a modern tax system to finance its debts; Spain still had a chaotic and often arbitrary tax-collection system.

It was almost inevitable that London emerged as the financial capital of Europe--and that Britain could so easily manage debts on a scale never before thought possible. By 1819, Britain’s national debt, measured as a percentage of national income, was actually much higher than the national debt of the United States in 1996. Yet the British Empire’s greatest days were still ahead of it.

Thus the current angst in Washington over the sheer size of the budget deficit and the national debt seems badly misplaced. In 1996, the U.S. national debt broke through the $5-trillion mark for the first time--yet few would question that America is now the preeminent military and economic power in the world.

*

To be sure, the upward trend in the numbers is intimidating; in 1996, the national debt as a percentage of gross domestic product was nearly 70%--the highest ratio since 1955, when the United States was still paying off the costs of World War II.

So as Congress once again debates a balanced-budget amendment to the Constitution, it’s time to decide: Is America’s model Britain or Spain? Is the expanding national debt a sign of America’s expanding ambitions or a sign of a loss of national will?

In a strange way, Bill Clinton’s controversial decision to agree to overhaul the nation’s welfare system should ultimately help the American people answer that question. Clinton may not have realized it, but his action has clarified what’s at stake in the budget crisis.

For years, budget analysts have been warning that the so-called entitlement programs--mandatory spending--are at the heart of Washington’s deficit mess. In 1996, entitlements ate up half the federal budget. Throw in interest payments on the national debt and more than 65% of the federal budget was on automatic pilot last year.

But all that entitlement money doesn’t go down some bureaucratic rat hole. It comes into Washington in the form of tax payments and then goes right back out again in the form of checks to retirees who pay their hospital bills through Medicare and the rent through Social Security. The money also goes to veterans, farmers and, until recently, welfare recipients.

Although “means-tested entitlements”--poverty programs--were among the smallest of the entitlements, they were always the most hotly debated. Inevitably, in the budget squeeze of the 1990s, they were the first to go.

While it hasn’t been widely recognized as such, the welfare reform bill that Clinton signed last August was actually the first act in what is likely to be a decadelong struggle over entitlements.

The reform legislation transformed the main welfare program, Aid to Families With Dependent Children--which had a 1995 price tag of more than $17 billion--from an entitlement into a block-grant program for states. As a block-grant program, it will have to undergo regular congressional reauthorization--and thus regular scrutiny. Welfare has been taken off automatic pilot.

Ending welfare’s entitlement status was by far the most significant provision of the reform initiative--and one of the most important changes in the federal budget process in a generation.

But what has been lost in the bickering over welfare reform is that it has simplified the outlines of the looming debate over entitlements. No longer will the debate be clouded by middle-class animosity over government handouts to the poor. The middle class will now find it impossible to ignore that entitlements are benefits for the middle class.

*

And the budget crisis of the early 21st century will be seen in its proper light--a battle over how much money the federal government should pay out to provide pensions and health care for aging baby boomer suburbanites.

After the turn of the century, lawmakers will find it impossible to avoid that debate. Maybe the United States will decide that it can continue to fund large deficits and a rising national debt to provide for the comfort of its aging middle class. Maybe it will decide that the world’s greatest power can do nothing less for its people. But at least the purpose of the national debt will be clear to all.