National-debt debate rages on

August 18, 2010 at 12:00a.m.

McClatchy Newspapers

WASHINGTON

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 say 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, Kenneth Rogoff of a Harvard University and Carmen Reinhart of the University of Maryland, published an acclaimed study last year of 800 years of national financial crises, “This Time Is Different.” They 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.