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      A Business Forum Book Review:

The Truth about the
National Debt

by Francis X. Cavanaugh

See also:
How Does the National Debt Affect Me?

          Especially in an election year, the national debt is the unavoidable target of both politicians and pundits. Common wisdom concurs the national debt is definitionally bad,  it is a national disgrace and, obviously, every effort should be made to reduce it. But despite the inflammatory rhetoric and impassioned emotions aroused by this issue year after year, nothing changes! Are we simply stupid or is this a monster now grown beyond our ability to control it? Or, are we alarmed about the wrong problem -- distressed by the symptom; ignoring the disease? 1

          The Truth about the National Debt: Five Myths and One Reality,  by Francis X. Cavanaugh (Harvard Business School Press, 192 pages, $22.95) is an authoritative and refreshing examination of this incendiary issue. Mr. Cavanaugh served in the US Department of the Treasury from 1954 to 1986 as an economist and as a senior career executive responsible for the management of the public debt. He was director of Treasury’s office of Government Finance and Market Analysis, and secretary and chief operating officer of the Federal Financing Bank. From 1986 to 1994, he was the first executive director and chief executive officer of the Federal Retirement Thrift Investment Board, the independent entity established by the Congress to administer the Thrift Savings Plan (a retirement program for Federal employees). His 42 years of senior service bring an extraordinary breadth of experience and impeccable authority to this work.

          Employing the clearest language and cogent arguments, Mr. Cavanaugh first debunks the five basic myths about the national debt, viz.

          He then addresses two fundamental concerns. His "One Reality"  is the Federal budget must be balanced now  to regain control over government spending -- to help restore confidence in the government. However, he would remove interest payments on the debt from this budget, and encourage a new public debt authorization process that would assure an annual focus and debate on the appropriate size of and interest obligations on the debt. Each fiscal year, a balanced program  budget would be approved by the Congress including a surplus account deemed appropriate to reduce the growth of the Federal debt. Cavanaugh explains,

          "... the real reason we should hate the deficit is that politicians should not have the pleasure of spending (getting votes) without the pain of taxing (losing votes). Without that discipline, federal spending is out of control.

          "The sole purpose of the federal budget should be to control federal spending. The budget should not be a vehicle for discretionary actions to moderate the business cycle; they do not work and they undermine spending control.

          "The only effective means of budget control is to require that federal spending proposals not exceed estimated receipts. Such a balanced budget requirement would ensure the budget discipline provided by politically unpopular tax increases."

          Cavanaugh’s other fundamental concern is with the Federal preemption of credit markets. There has been a frightening increase in the portion of net credit market borrowing required to finance the programs of the Federal government, including guaranteed and sponsored agency debt -- from an average of 17 percent of net credit market borrowing in the 1960s to an extraordinary average of 68 percent in 1991 through 1995. He believes we should be seriously concerned about the growth of government-sponsored enterprises (GSEs) and other Federal assistance programs such as the FNMA (Fannie Mae) and FHLMA (Freddie Mac). These represent the biggest and quietest Federal takeover of the US credit market in our financial history. He proposes that the GSEs be subject either to the discipline of the free competitive market, or to the budgetary or other disciplines imposed upon other government agencies. One specific recommendation is to charge the GSEs a guarantee fee thereby offsetting their advantage over competing private institutions that are self-supporting.

          The Truth about the National Debt  offers straight talk and a lucid analysis of a major public policy issue. A national debt ceiling of $8.18 trillion may now appear to be "too big to handle."  But Francis Cavanaugh has exposed the real demon, and has demonstrated the demon can be exorcised by demanding the discipline and accountability provided by a credible Federal program budget process each fiscal year.

1 See,  "How Does the National Debt Affect Me?," The Business Forum  Online, for an earlier exploration of this public policy issue.

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