Policy Points: If Properly Managed, (Federal) Debt is Good

By Richard Eidlin

Some policymakers are concerned about the dangers of adding to the national debt and don’t want to raise the debt ceiling, which the nation will hit on Feb. 7. They say it’s just not sustainable.

Surely, there’s such a thing as too much debt, and there are some things for which we shouldn’t borrow. But debt is not always bad. It all depends on what it is used for and how it is managed. If the reasons and the goals are sound, debt can be good -- really good.

This is something business owners understand particularly well. For a business, the typical goal is increased profits down the road. But what are the right goals for federal debt?

Our national debt was originally created to pay the costs of the American Revolution. More recently, federal debt financed our rail system, as well as World War II, and rescued the economy from the financial crisis of 2009. These have all paid off handsomely.

Today, we have an opportunity to move our economy to one that is more sustainable -- one that protects the planet and ensures that everyone is able to share in both producing and benefiting from a growing economy. This will not be quick or easy, but it could be enhanced significantly by government investment. From this perspective, it’s not that our national debt is unsustainable, but rather that it's a main goal for taking on additional debt needed to build a sustainable economy.

As with a business, founding a country or making strategic investments for a country’s future means incurring significant costs -- but the payoff can be extraordinary.

"Debt can be powerful fuel for starting or growing a company," says Denise Bowyer, vice president at American Income Life (AIL), based in Waco, Texas. AIL was founded with $25,000 in borrowed funds and is now a billion-dollar company employing thousands of people. "Those opportunities would not be available if it weren’t for debt," Bowyer explains.

We have seen the same in our nation's past. The Interstate Highway system, which cost $425 billion to build (in 2006 dollars), created $6 in economic productivity for each dollar spent, according to one estimate. The 2009 stimulus bill added as many as 3.3 million jobs and helped boost the economy at a time when a jolt was desperately needed. Perhaps the best example was the New Deal, which created millions of jobs during the worst slowdown in our history.

All of these programs cost money. At least some of that money was borrowed. But how much real value did they produce for the economy? And how much better off would we be, both now and years in the future, if we borrowed money and invested it in renewable energy, high speed rail, worker training or regulations that support innovation in industries to make sure we have good jobs and safe products for generations to come?

Bowyer explains that investments in programs like early childhood education and job training will move us closer to a sustainable economy. "The currently shrinking middle class can best be halted through policies that support higher learning and higher earning. Future workers earning more money and having the ability to compete is one of the best investments we can make," she says.

The national debt has been a constant throughout our existence. The highest our debt has ever been, as a percentage of GDP, was 112 percent at the end of World War II. Today, it stands at about 73 percent of total GDP. Overall, the United States has only been debt-free for one year in its history, and that ended quickly due to a recession.

Of course, not all debt undertaken by the federal government will have a positive impact on building a sustainable economy. Policymakers should always be looking for smart ways to reduce debt. For example, one bill on Capitol Hill that would close several offshore tax loopholes could bring in $220 billion in revenue over 10 years. Ending subsidies to oil companies could bring in billions more. Cutting defense programs that are ludicrously over-budget could also help, as would cutting subsidies to commodity food producers. These can all help slow the rise of our national debt and free funding for smarter, more strategic purposes that we can all get behind.

"Debt is not itself inherently evil," says Josh Knauer, president and CEO of Rhiza Labs, a software company in Pittsburgh, Pa. "Debt can be a very valuable business tool to use to acquire the capital needed for growth. Borrowing within reasonable limits makes a lot of sense for businesses and the government."

Building a sustainable economy will require the government to take on debt. We just need to make sure those financial obligations are for truly worthy and sustainable initiatives.

Image credit: Flickr/woodleywonderworks

Policy Points is produced by the American Sustainable Business Council. The editor is Richard Eidlin, Director – Public Policy and Business Engagement.