A Bad Way to Cut the Debt
The plan was: a $400 billion federal budget surplus this year and a national debt of $2.1 trillion heading rapidly to zero. That was the plan back in January 2001, when President Bush took office. And not just the plan: That was the official prediction of the nonpartisan Congressional Budget Office. Now we have a new plan. Instead of a $400 billion surplus, President Bush's budget calls for a $500 billion deficit. The national debt is $4.4 trillion and headed to more than $6 trillion over the next 10 years, according to the CBO. Interest on that debt will cost $156 billion this year. Bush says he'll cut the deficit in half in four years. The deficit, not the debt. It's a remarkably modest brag. And even so, almost nobody believes him.</br></br>There are four ways to deal with a gigantic government debt. One is to live with it. But this is not a stable situation. Even if you're living within your current means and borrowing only to cover the interest payments, your debts will compound. When deficits turned into surpluses in the late 1990s, the achievement was especially impressive, because it required the government of the time not just to cover its own expenses but to pick up retroactively a lot of the expenses of the spendthrift 1980s.</br></br>That is the second way to deal with a soaring national debt: fiscal discipline. The third way is through an economic miracle -- an explosion of productivity that increases tax revenue painlessly. Fiscal discipline and a booming economy both helped in the late 1990s. But you cannot count on another economic miracle like that one. As for the prospect of fiscal discipline: No one looking at the past four years can reasonably expect that from President Bush, and it hasn't exactly been a major theme for John Kerry either.</br></br>Luckily -- or not -- there is a fourth way to deal with the national debt. That is inflation. Inflate the debt away. The temptation is enormous: The United States government is a debtor that can borrow any amount of money and pay it back in a currency whose value the debtor controls. Other governments are forced to borrow in dollars, not in their own currencies, when lenders start getting suspicious. But Uncle Sam remains preapproved.</br></br>In fact the process is already at work. Inflation is about 3 percent. So this year we're adding a half-trillion dollars to the national debt, but inflation is eroding the real value of that debt by 3 percent of $4.4 trillion, or . . . let me see (where is that abacus?) . . . $132 billion. Is that right? That's about a quarter of the deficit. Every percentage point of inflation slices the real value of the national debt by $44 billion. At about 11 percent, inflation starts to reduce the debt faster than we're increasing it. Keep going and you can wipe it out.