NCPA - National Center for Policy Analysis

DEFUSING THE DEBT BOMB

January 25, 2010

Whatever the White House does, the national debt figures to be a major issue in the 2010 midterm elections, says Matthew Continetti, an Associate Editor with the Weekly Standard.  

For example: 

  • The public debt of the United States is 53 percent of gross domestic product (GDP) and rising.
  • A new study from the Peter G. Peterson Foundation projects it will reach 85 percent of GDP by 2018; 100 percent by 2022; and 200 percent in 2038. 

What debt can do to a society is well known.  Besides the restrictions it places on future generations, excessive government borrowing crowds out private investment and can lead to higher interest rates.  Now there is new evidence that massive debt hampers economic vitality, says Continetti: 

  • In a January 2010 paper, "Growth in a Time of Debt," economists Carmen M. Reinhart and Kenneth S. Rogoff find that, above a debt-to-GDP ratio of 90 percent, "median growth rates fall by 1 percent, and average growth falls considerably more."
  • Consider Japan, where public debt hovers around 200 percent of GDP and the economy has been stagnant for a decade and counting. 

Anyone who has read a paper over the last year is aware that the tools governments use to fight debt are just as unpleasant, says Continetti: 

  • Since spending cuts are politically unpalatable, officials hike taxes and thus reduce incentives for entrepreneurial risk taking, investment and research.
  • Another tactic is inflation, a silent tax on the middle class that punishes saving.
  • Default and currency devaluation? They are signs of second- (or third- or fourth-) rate powers. 

Take Greece, for example.  The new center-left government has come to power at a time of economic crisis and political upheaval, says Continetti: 

  • The deficit has spiked to almost 13 percent of GDP.
  • Public debt is 113 percent of GDP and rising.
  • Standard & Poor's has downgraded the nation's credit rating.
  • Foreign powers are urging the government to cut expenses as a potential default looms. 

The only pain-free way to lower the debt burden is economic growth; that is how America recovered from World War II, when our debt-to-GDP ratio was a record 122 percent.  But no one knows when the next boom will start.  And the Democratic playbook of tax, spend and regulate may delay it, says Continetti. 

Source: Matthew Continetti, "Defusing the Debt Bomb," Weekly Standard, January 25, 2010, 

For text:

http://theweeklystandard.com/articles/defusing-debt-bomb 

 

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