Reinhart and Rogoff's correlations are suggestive, but not dispositive. Slow growth might cause debt to grow as a share of GDP rather than vice versa. Tax revenues decline during economic downturns while demands for public services (such as unemployment insurance and food stamps as well as explicit economic stimulus in the US) increase. And simple arithmetic says that debt/GDP will rise when GDP falls, all else equal.

But there are good reasons to think that too much debt would slow down economic growth. Government borrowing pushes up interest rates and crowds out investment and consumer spending on homes, cars, and other durables.

Admittedly, the link between debt and interest rates has not been apparent for some time. Currently, T-bill interest rates are barely above zero (and negative in real terms). But the lack of an interest rate response is not necessarily good news, especially if it persists for a long time. As long as interest rates are miniscule, deficits appear to be nearly costless, making them a much more attractive option for policymakers than spending cuts or tax increases. This fuels the accumulation of public debt. At some point, investors looking at US debt of 100 or 200 percent of GDP (or more) may question the assumption that T-bills are riskless. But if interest rates go up, our debt will grow faster, raising the risk that we won't be able to pay off our creditors or (more likely) would have to print money to meet our obligations, producing inflation. The higher risk implies an even higher interest rate. As a result of this vicious cycle, interest rates could explode over night as investors wake up and realize that we are insolvent.

At that point, with virtually no access to capital and tens of trillions of dollars of debt coming due, we would be forced to cut spending to the bone, raise taxes to levels never seen before in this country, and print an enormous amount of money. The result would likely be a worldwide economic depression and inflation or hyperinflation in the US. This is what my coauthors and I call "catastrophic budget failure." It would be a disaster.

And if you think a financial market bubble for government securities couldn't develop and then burst with horrific consequences, you haven't been paying attention.

Collapse

At the peak at the end of FY 1946, gross US national debt was 121.7 percent of GDP. Today the number is just under 70 percent. In 1946 the
debt held by the American public – including by the Federal Reserve
System – was 108.6 per cent of GDP. The comparable figure for 2009 is just under 60 percent of GDP. As of the 2010 budget it was expected to rise to 70 percent in FY 2011, and to decline thereafter.

After 1945, the debt/GDP ratio declined gradually. Levels comparable to
the present were seen throughout the late 1950s and into the 1960s. They were lower in the 1970s – an economic period marked by inflation, which reduced the debt/GDP ratio – and higher again in the 1980s, as the economy recovered from the sharp slumps of 1980-82. That's the record.

Those high public debt levels of 1946 were completely benign. Long-term interest rates were pegged at two percent. Series E bonds -- Victory bonds -
- formed a very large part of the financial wealth of the American middle class at that moment. In fact, they created the American middle class -- a working population that had never before enjoyed any financial security at all. Their existence, as claims on future purchasing power, gave businesses confidence to invest, and so helped avert a relapse to the Great Depression.

Comparatively, US public debt in relation to GDP today is well within the normal range for advanced and solvent countries, including Germany, Canada, France and Austria. It is lower than many, including Italy or Greece -- a small, vulnerable country whose bond offerings just last week were nevertheless 3:1 oversubscribed. The US position is obviously stronger than most, because of the dollar's international role. So there is no basis, whether in history or cross-country comparison, for the current panic over public deficits and debt.

Yes, conditions are different today. The American public no longer holds the American public debt directly. Some of it is held abroad, where interest payments just pile up, with no good effects on financial wealth or spending here. Much of it is held by banks, who are doing nothing to promote economic recovery. The middle class, which holds housing, stocks and cash, is hurting on all fronts. These are problems. But they are not problems of too much public debt, rather of its distribution.

In phrasing his question, John Maggs describes it as "unanswered." It
could also be described as "unanswerable." For there is *no* level at which the rise in our public debt would act as a "drag on growth."
Deficits promote growth. Debt finances it. The consequence of too much is not a "drag on growth," but inflation. But we are very far from that, since
we're very far from full employment. We'd be lucky to get closer than we
are.

One has to ask, why all the fuss and bother? Clearly, one part reflects the success of political propaganda aimed at discrediting last year's stimulus strategy, and blocking any further such moves. Another part is a long-running campaign, funded from Wall Street, to undermine Social Security and Medicare. These are now converging in a flurry of bipartisan commissions, spending freezes, and other signs that the White House is having a panic attack.

No-drama Obama, where have you gone?

Collapse

One clear answer to the question “How much debt is too much?” is: “The level of debt we will reach in coming decades if current budget policies remain unchanged.” Like virtually all other analysts who have examined long-term deficits, we have concluded that deficits and debt will explode if we don’t make changes in those policies, especially changes that will help slow the very rapid growth of health care costs. We estimate that the debt will skyrocket from 53 percent of GDP at the end of fiscal year 2009 to more than 300 percent of GDP in 2050. That level of debt would seriously threaten the economy.

The key to avoiding this outcome is to adopt policies that will raise revenues and reduce spending after the economy is back on track, in order to keep deficits small enough that the debt stops rising relative to the size of the economy year after year. If we can reduce the annual deficit to about 3 percent of GDP around the middle of this decade — an ambitious but reasonable goal — we can stabilize the debt-to-GDP ratio so the debt grows no faster than our ability to pay the related interest costs. The debt would level out at a little over 70 percent of GDP. Policymakers then can decide whether it would be desirable to take additional steps to bring the debt down, but the first and most important step is to take the steps that are necessary to ensure that the debt doesn’t keep growing faster than our economy.

Collapse

There is no magic number on the size of the debt that necessarily signals trouble. The long-term outlook does show that the US debt will grow faster than the overall economy and will eventually become unsustainable. This is a valid concern and we should take the long-run issue seriously.

However, there are no signs yet that this is a real problem in the short-run. Interest rates for federal borrowing are very low—both short-term and long-term—as are inflationary expectations. Also, I think there is a good reason to believe that the 90 percent threshold may be too low. The study looks across countries as well as across time, and because of the strength of U.S. institutions, we may be able to sustain a higher debt level than in other countries. This isn’t to say that we should test those grounds, but right now, we are well below that threshold, and have room for additional efforts to spark job growth.

Further, the larger threat to the economy comes not from long-term debt projections, but rather from economic stagnation and slow job growth. A weak recovery will mean lower revenues and higher spending, compounding the fiscal problems. The best thing we can do to address the long-term debt is to get the recovery on the right track today.

Collapse

Any unnecessary debt is a drag on the economy because it means the government transferred resources from the private sector to the Public sector with promises by the government to permanently take by force said sums in the future. Ceteris Paribus, all things being equal, the nation is stronger with less debt than more. If one had to borrow money to fight world war two or the civil war where the fate of the nation was at stake one can argue that the cost is outweighed by the benefit. Borrowing to pay for a politicized “stimulus” bill that simply fattens government spending at the expense of the productive sector is a deadweight loss to the economy whether it is one dollar or a trillion. More waste is more waste. But waste is waste.

Editor's note: Len Burman and co-authors tackled this question, among others, in this paper, delivered Jan. 15 at a Tax Policy Center/University of Southern California conference in Los Angeles.

There is no magic number, but by any standard the U.S. debt is on an alarming trajectory. The recession and the financial crisis ballooned the debt, and far more serious debt increases are looming ahead. CBO projects continuous increases in debt held by the public—zooming through 100 percent of GDP and on up--if spending and revenue policies are not changed soon. These future deficits result from promises made under Medicare, Medicaid and Social Security that will drive spending up much faster than GDP and revenues even if the economy recovers and interest rates stay in moderate ranges. The fact that much of our debt is held by other countries, especially China, makes us vulnerable, and the interest increase likely to be demanded by our creditors as our borrowing increases will make debt service an increasing burden on taxpayers. It is hard to over-estimate the importance of addressing this problem seriously and soon.