Archive for Wednesday, August 18, 2010

Debate rages over debt

August 18, 2010


— The national debt is rising to levels that have never been seen in the United States during peacetime. Everyone agrees that it must come down. The question is how fast. Too fast could weaken the already weak economy. Too slow could do the same thing.

When the nonpartisan Congressional Budget Office updates its 2010 Budget and Economic Outlook on Thursday, it will renew debate over the debt.

Deficit hawks argue that radical steps must be taken now to reverse the soaring debt. This year’s federal budget deficit alone is expected to close the fiscal year Sept. 30 in a range between a staggering $1.3 trillion and $1.42 trillion. That’s about six times President Ronald Reagan’s biggest deficit, and he was blasted as a dangerous budget-buster.

The annual deficit is the gap between tax revenues and the government’s spending in a year. The government covers the gap by borrowing, which raises the national debt. Today U.S. debt held by the public totals almost

$8.8 trillion. Include money the government owes its trust funds, such as Social Security, and the number swells to $13.3 trillion.

Paying interest on that much debt wastes resources, the hawks argue. It makes America dependent on foreign lenders. The debt also threatens to drive up interest rates, and to swallow so much capital that the private sector is starved of investment, leading to economic stagnation.

Liberals argue that the United States is markedly different from other economies that suffered debt crises, so we’re not in the same danger. Because the U.S. dollar serves as the world’s reserve currency, and because the U.S. is the world’s largest economy, many other economies depend on it, so they’ll finance our debt.

Liberals also argue that reducing deficits and debt must wait until the U.S. economy has recovered its vigor, or debt reduction will risk kicking the economy back into recession.

Two prominent economists who published an acclaimed study last year of 800 years of national financial crises, “This Time Is Different,” see flaws on both sides of today’s argument. The debt must be dealt with, they say, but not too fast.

Their book concludes that when any nation’s ratio of government debt to gross domestic product exceeds 90 percent, negative economic consequences historically follow. Today’s U.S. debt-to-GDP level is 89 percent.

The U.S. must reduce its debt or suffer economic stagnation, they said in interviews with McClatchy Newspapers, but in the short term they also favor more government stimulus to boost the economy, even if that raises the debt a bit more.

“We may need another stimulus bill just to decompress from the previous one, a smaller one to cushion the landing,” said Kenneth Rogoff, a Harvard University economist and a co-author of the book.

Added his co-author, Carmen Reinhart, a University of Maryland economist: “I’m not one of those deficit hawks. ... I’m not saying you run out and pull the plug and have an adjustment that could derail what fragile recovery we do have.”

However, she cautioned, “the whole thing that we can disregard debt because we’re the U.S. is really grasping at straws. Taxpayers need to understand the tradeoff, and that is, we’re going to be paying for this in terms of lower growth in the future.”

There are contemporary examples: Latin America’s “lost decade” of the 1980s and Japan in the 1990s illustrate how long periods of stagnation follow financial crises and huge debt overhangs.

The two were careful to note that they don’t think a full-blown debt crisis is imminent, but they fear that the U.S. economy is entering a danger zone.

“It’s remarkable the extent to which the U.S. is following the past, deep postwar financial crises. I think the big issue is really what’s happening three or five years out. Growth back to normal is a really big question mark,” Rogoff said.

But beyond the government’s role, Rogoff cautioned, other factors help determine growth.

“A lot depends on how productivity (worker output per hour) evolves, the interaction of globalization and technology. There are a lot of patterns besides fiscal policy that are going to determine how we grow,” he said.


just_another_bozo_on_this_bus 7 years, 8 months ago

The solution is quite simple-- cut war spending by 80%, and institute a single-payer healthcare system. Use the savings to pay off the national debt and it would be gone in 10 years.

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