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Debt Downgrade

Analysis: It’s about revenues, not debt

Chris Farrell Aug 11, 2011
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JEREMY HOBSON: Well another country that’s getting very serious about cutting debt is Italy. Lawmakers there want to add a balanced-budget amendment to the Italian constitution. That’s something that’s been talked about here in the U.S. as well.

For more, let’s bring in Marketplace Economics Correspondent Chris Farrell. Good morning.

CHRIS FARRELL: Good morning, Jeremy.

HOBSON: Well, Chris, what about this idea — have we ever actually in our history just spent the money we took in from tax revenues?

FARRELL: Well, we’ve actually done even better than that — Andrew Jackson, President Andrew Jackson at the end of 1834, he hated the national debt. He paid it off. And, the nation started off next year with a balance at the Treasury of $440,000. Of course that was one of the actions that contributed toward a 72 month depression that followed not too long afterwards, but, you know, seriously, if you look at the history of this nation, for about the first 160 years up to 1936, once you take into account wars and depressions, we did a reasonable job of maintaining a certain amount of balance and keeping the debt under control. It never really went over 40 percent of GDP. And if here’s a time when the debt really soared, in the 1860s, hey, that helped save the union. In the 1940s, it helped save the world.

HOBSON: Well, do we disadvantage ourselves then, by not taking advantage of our still pretty good credit rating and taking on some debt?

FARRELL: I think we are. One of my favorite economists, Andrew Samwick at Dartmouth University, and he’s been pounding the table, or I guess really his blog, you know, month after month. With interests rates this low, what the United States should be doing is borrowing and having a master infrastructure spending program because we need to upgrade this infrastructure — and if you don’t have to pay much for the debt, why not do it?

HOBSON: Can you grow as a country without going into so much debt though? Because obviously there are a lot of people in Washington and elsewhere who are very concerned with the amount of debt we have.

FARRELL: Look, it isn’t about the debt. Lord Thomas Babington Macaulay, he was the great historian in the 19th century. And you know, he looked back at Britain and he said very serious people were always saying Britain’s rising debt would bring ruin and bankruptcy to the nation and it kept getting bigger and wealthier and more powerful. The issue is how do you pay for the debt? So our discussion, is about revenues and taxes, not the debt.

HOBSON: Marketplace’s Economics Correspondent Chris Farrell. Thanks so much.

FARRELL: Thanks, a lot.

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