JUNE 5, 2010, 5:00 AM ET
Number of the Week: U.S. Debt Nears Key Threshold
88%: Gross U.S. public debt as a share of annual economic output.
There’s little doubt that the U.S. needs to get its mounting debts under control. But at what point do they become a clear and present danger?
By some measures, we’re reaching that point about now. As of Friday, our total national debt – the sum of all outstanding IOUs issued by the U.S. Treasury – stood at a bit more than $13 trillion, or almost 90% of our projected gross domestic product for 2010.
The 90% level is significant, because recent research by economists Carmen Reinhart and Kenneth Rogoff suggests that once a developed nation’s debt crosses it, its annual economic growth tends to be about one percentage point lower. At a time when economists are saying it could take years for the U.S. to bring unemployment back down to pre-recession levels, that percentage point could make a big difference.
To be sure, the concept of the 90% threshold isn’t without its critics. Princeton University economist Paul Krugman, for example, notes the U.S. last crossed the threshold after World War II and did experience slow growth, but the problem wasn’t so much the debt burden as millions of women leaving the paid workforce. And in many cases, such as Japan, slow growth could be the cause of the debt burdens, not the other way around.
Thresholds aside, there’s no reason to be sanguine. Back in the 1950s, we had a good excuse to be indebted: We’d just fought to save the world from fascism. And a large chunk of our debt was held by our own citizens, much like Japan now — one reason economists think that country has managed to survive with a gross-debt-to-GDP ratio of more than 200%.
This time around, the roots of our indebtedness are very different. We’re borrowing to bail out consumers who took on too much credit and couldn’t pay, and to support social-security and Medicare systems we can’t really afford. We’re able to do this because financial markets have maintained a surprising faith that we will eventually get our spending under control, and because the dollar’s role as a global reserve currency has kept our borrowing rates unusually low.
The travails of Greece demonstrate the hazard such easy borrowing terms can create. After Greece adopted the euro, markets began to treat it more like any other European economy, allowing it to borrow at interest rates nearly the same as Germany or France. That, in turn, helped Greece get into much deeper debt trouble than it would have otherwise. As a result, it now has to implement austerity measures that will likely yield much deeper economic pain.
So far, markets have given the U.S. a longer leash. The danger is that we’ll hang ourselves on it.
http://blogs.wsj.com/economics/2010/...key-threshold/
Originally Posted by Ominous Gamer
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