U.S. Debt/GDP hit its historical peak of nearly 130% in 1946, at the end of WWII. Then, as now, the government had spent the equivalent of trillions of dollars. However, the money spent in the 1940s was used to create a solid foundation for growth. The U.S. emerged from the war with the highest industrial capacity of any developed nation. Our exports surged because we could supply products the world needed in abundance. In turn, new industries provided a high number of well-paying, middle-class jobs. The standard of living for both rich and poor Americans soared. Economic growth took off and remained strong into the 1960s and beyond.
Clearly, we need another such foundation, and building one would be well worth the added debt. You see, one of the great things about strong economic growth is that it makes debt more manageable. This is true for individuals as with nations. If you have large debts, you have only a few options. You can consolidate your various loans to get a better interest rate, or you can reduce your spending, which is psychologically hard. But the absolute best way to make debt manageable is to increase your income. In fact, you could say the burden of debt is relative not primarily to income but to income growth. Hence, borrowing money for education that leads to a better job is a good investment.
Similarly, everyone understands that businesses benefit when they take on debt in order to expand. “Good debt” is an investment that leads to higher revenues.
The problem in America today is that no one in government or out, on the left or the right, makes the distinction between bad government debt and good government – between spending and investment. They assume all debt is bad, which is not the case. The 2009 stimulus package was bad, not because it increased debt but because it did not create investment in new growth industries.
Please note, in advocating government investment, we are not promoting socialism. Capitalism often benefits directly from government investment. Such was the case with the industrialization program in WWII or the creation of the interstate highway system. Both programs increased productivity and corporate profits as well as median incomes.
Another example of government investment was the stimulus program launched by China in the wake of the 2008 recession. Relative to its GDP, China's spending program was many times larger than that of the U.S. Yet no one criticizes China for runaway government spending, because this program was all about investing in new industries and new jobs. It was a program to raise the GDP, thereby strengthening the country's financial state.
If the U.S. economy is to have a bright future we also need to invest in new industries that can address our most pressing problems, chief among which is resource scarcity. Yet despite its urgency, our leaders seem willing to pay it only lip-service.
In a recent update, we discussed the Nobel Prize given to the two physicists who discovered the properties of graphene in 2004. Graphene has some unique properties that could lead to new ways to store and produce energy. It could lead to better integrated circuits, wind turbines, and solar cells that could help reduce our dependence on Middle East oil.
Sure, it would take many billions of dollars to develop graphene-based applications. But along with superconductors, graphene may offer important solutions to the problem of energy scarcity. Its development is extremely important. Yet today, the most up-to-date spell checker on my computer won't even recognize graphene as a word – though it recognizes the names of many other things far less important and vital to our future. Clearly, our society has its priorities out of whack. (From Stephen Leeb's e-mail)
