Regardless of the specifics of President Barack Obama's stimulus plan, the dollar amount or where it will be spent, all of the money will be borrowed. The plan has the potential to become a perpetual burden for future generations. To avoid that, any stimulus package must include a mechanism for repayment of the resulting debt.
Consider this: Of the $820 billion stimulus package, roughly $220 billion will be used to buy capital assets -- items such as buildings, autos and equipment. In the past, the federal government has borrowed to buy such assets using perpetual debt. Money borrowed to buy such assets over the last 50 years has never been repaid. Our debt has only gone up during that time.
It is more than likely that many of the assets purchased over the past 50 years were long ago sent to the scrap heap. And we continue to pay interest on the debt that funded those purchases with no plan to ever pay it off.
To avoid compounding the problem, any funds borrowed under the stimulus plan to purchase capital assets should include a suitable amortization time frame for complete repayment. Given the economy, interest-only payments would be made for now. However, principal payments would commence once economic data confirm the recession is over. Then, tax collections or reductions in federal government spending equal to the amortization of this debt would need to be part of any future budget.
Simply put, by the time the assets purchased under this plan are worn out the debt used to fund those pur-chases should be gone as well.
ADVERTISEMENT
The balance, $600 billion, is borrowed to fund program costs or tax relief. Although this is arguably a good thing to do, no tangible assets are acquired with any of these funds.
Again, Congress should stipulate that repayment of this portion would occur shortly after the end of the recession. It would be reasonable and fiscally responsible to expect the repayment be made over only several years, or the life span of a typical economic expansion. The argument for spending this money is to create an economic recovery, so once that is accomplished we need to pay for it within that economic recovery.
This structure will require the federal government display great fiscal restraint during the next economic expansion -- a good thing. By paying off the soft-cost items funded with this stimulus debt during the next economic expansion, when the next recession hits, the federal government will hold greater capacity to fund any then-needed stimulus packages. And by systematically paying off the debt used to buy assets, as those assets are used up, the federal government will have greater capacity to borrow again to acquire then-needed new capital assets.
It is not fiscally sound for this stimulus plan's debt to survive in perpetuity.
Indeed, for another day, but soon, we should examine how we might repay most if not all of the present fed-eral debt. It can be done. That way the debts incurred by this generation do not become the burden of the generations that follow.
Louis Gingerella teaches accounting and finance in the MBA program at Rensselaer Polytechnic Institute's Hart-ford, Conn., campus. Before that he spent 25 years in banking, primarily in commercial lending.
