WHAT'S SO BAD ABOUT THE NATIONAL DEBT?

Byline: Christopher Lehmann-Haupt The New York Times

At the opening of his useful new book, ``Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt,'' John Steele Gordon drops what at first seems an encouraging tidbit of news. The present national debt of more than $5 trillion is certainly ``incomprehensible to the average American,'' he admits. ``For the record,'' he writes, ``laid out in silver dollars, it would be about 120 million miles long, wrapping around the equator 5,000 times.''

However, ``considered as a percentage either of gross domestic product (usually called GDP, it is the sum of the goods and services produced within our borders) or of federal revenues,'' our debt ``is nowhere near as high as was the British national debt in 1819, the year Queen Victoria was born and when Britain was, in the words of the late historian Cecil Woodham-Smith, `within sight of the heights of power and of wealth from which it was, briefly, to dominate the world.' ''

Whew! What a relief! By such a measurement, our debt isn't bad at all. So does this mean that the current concern is overblown and that the country can now relax and go on running up deficits?

Gordon, who writes ``The Business of America'' column in American Heritage magazine, thinks not. The problem, he writes, isn't the size of the debt, but instead its recent trend. ``For that trend results not from a deliberate political decision to spend in deficit, but rather from nothing more than the sum of myriad decisions regarding taxing and spending that, collectively, now substitutes for fiscal policy.''

To understand how the country reached its present pass, Gordon examines American history using the effects of five wars as focal points. In a chapter called ``The Hamiltonian Miracle,'' he describes how Alexander Hamilton paid off the cost of the Revolutionary War by creating a federal bank that assumed the debts of the various states and thereby created the first national deficit.

In ``Andrew Jackson Redeems the Debt,'' he reviews how after the War of 1812, the seventh president used the surpluses generated by a high tariff ``to rid the federal government of debt entirely'' and thereby circuitously ``contribute in no small way to the country's first great depression.''

In ``Armageddon and the National Debt,'' Gordon shows how the imposition during the Civil War of the nation's first federal income tax eventually raised the question of how the burden of such a tax ought to be distributed.

In ``The Twilight of the Old Consensus,'' he traces how fiscal policy after World War I led to the shock of the Great Depression.

And in ``Keynesianism and the Madison Effect,'' he argues that after World War II, economists fell under the influence of the Madison Effect (so called by Gordon because James Madison said ``Men love power'') and exploited Keynesian deficit-spending theory to dictate monetary and fiscal policy.

Besides neatly summing up American economic history, Gordon uses these five chapters to reveal larger patterns.

For one thing, as Hamilton dreamed, the national debt always reflected the cost of wars and depressions, at least until after World War II, when instead of reducing debt, economists used fiscal policy to pursue dreams that couldn't be fulfilled because of the inherent flaws of Keynesian theory.

For another thing, Gordon argues, reducing the burden of taxes on the rich has repeatedly increased revenues, at least until the tax code became too unwieldy to adjust. In short, supply-side economic theory works! The trouble is that Congress has evolved into a body that can no longer adjust spending to revenues. In fact, he writes, ``in recent years, Washington, wrestling with the budget deficit, has come to resemble more and more a drunk wrestling with alcoholism.''

How to recover? In conclusion, Gordon finds four lessons taught by the history he has summed up.

First, since Congress, long since democratized by the Jacksonian revolution, no longer provides the brake on spending that the founding fathers could count on from wealthy legislators, Gordon proposes to reverse the Constitution's intent and ``give the president the power to set the limit on overall spending, subject to a congressional override, and the power to enforce that limit with cuts in all spending, not just that specifically appropriated every year, as needed.''

Second, since corruption is no longer built into the system, as it was ``in the early days of the republic'' when ``many sought political office precisely for the potential profits involved,'' Gordon wants ``the PAC system of financing political campaigns'' abolished. ``It cannot be reformed,'' he writes, ``any more than slavery could have been reformed and for precisely the same reason: It is inherently morally corrupt.''

Third, he wants a modern system of accounting imposed on the Congress. ``The effect on the country's fiscal policy,'' he writes, ``and thus on the debt, would be considerable.'' And finally, as an alternative to the present tax code with its high marginal tax rates (``counterproductive at best, perverse at worst''), he endorses a flat tax, arguing that while its marginal rate is flat, its effective rate is progressive when a personal exemption is taken into consideration.

The point of Gordon's exercise in succinctness, which began as an article in American Heritage, is not whether you agree with his proposals for a solution, or even whether you share his view of the problem. The appeal of ``Hamilton's Blessing'' is the broad perspective it offers in little more space than a chapbook. Gordon's subject may well be dismal, but his delivery of it is short and stimulating.

Title: ``Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt''

Author: John Steele Gordon

Data: 214 pages, Walker & Company; $21

Our rating: 4 stars

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Photo: (1-2) American Heritage magazine columnist John Steele Gordon takes on the history of U.S. fiscal policy in ``Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt.''