Can U.S. grow without even more debt?

Politics,Beltway Confidential,Barbara Hollingsworth

President Obama’s new budget would increase federal indebtedness to $23.1 trillion in 10 years. This staggering sum, equal to the entire GDP of the United States. gives Obama the undisputed title of Biggest Spender of All Time.

Meanwhile, The Washington Examiner’s Conn Carroll warns that the U.S. government, which already borrows 40 percent of every dollar it spends, might even once again hit its debt limit sometime before Election Day.

While conservatives and Tea Party folks rightly rail against the unsustainable debt burden such reckless spending will impose on future generations of Americans, Bill Wilson of Americans for Limited Government asks in a provocative blog post: “Can the economy grow without debt?”

Wilson posts a table showing that between 1945 and 1970, growth in the nation’s total debt – government, corporate and personal – was directly tied to growth in the U.S. economy and “remained in a narrow range of 140 percent to 160 percent.”

Republican President Richard Nixon severed the dollar’s tie to the price of gold. “Once the dollar lost its anchor in true value in 1971, the following decades saw the most unprecedented expansion in our history,” Wilson points out. “Credit exploded in the period that immediately followed, growing at a rate of 63 percent from 1970-1975, 80 percent from 1975-1980, 82 percent from 1980-1985, and 60 percent from 1985-1990.”

However, Wilson notes that “the fundamental relationship in the economy has been inverted; where before growth determined the amount of debt expansion, now debt expansion determined growth.” And like a drug addict who keeps needing a bigger and bigger fix, the U.S. economy needed ever larger expansions of credit just to stay in the black.

“In the 2000’s, credit expansion outpaced economic growth nearly 2 to 1,” Wilson points out, which means that two units of credit are now required for every one unit of economic growth. If growth in the U.S. economy is now dependent on such a lopsided expansion of credit, the fact that private businesses and individuals stung by the Great Recession are still either unable to borrow or wary of doing so could help explain why the nation remains stuck in the low-growth, high-unemployment doldrums.

“If this relationship continues, we will have to have debt increases on a mind-numbing scale just to meet modest growth projections,” Wilson warns.  The converse seems to be that if the federal government stops borrowing, the fragile economy will go south in a hurry.

“If ever more debt and credit expansion leads to less and less growth, what gets us out of the trap we find ourselves in? If strict austerity ensures an economic contraction and more debt simply leaves us in a zombie state, is there a third way?” Wilson asks.

That’s an excellent question to ask all the presidential and congressional candidates

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