As the looming debt challenge gains currency in the mainstream media, and conservatives and liberals show up on television debating the right combination of spending cuts and tax increases, it will be important to explain exactly why the deficit should be cut in the first place. Yes, interest payments are scheduled to rise to nearly 17 percent of spending toward the end of the decade. Yes, as the global economy recovers and the US starts to heat up we can expect interest rates to rise. But a lot of people are going to wonder why all these men and women in business suits are worried about in the first place.
One reason I imagine this debate will be confused and ripe with misunderstanding is that the statistic many deficit watchers pay most attention to -- the public debt-to-GDP ratio -- has no logical ceiling or warning signs. As a rule of thumb, rich countries are safe with a 60% ratio. But there are exceptions. The United States soared past the 100% mark during World War II, but we paid it down relatively quickly after the war ended so that it fell below 50% in the 1960s. On the other hand, as the Economist points out,
Britain's debt burden rose from 121% of GNP in 1918 to 191% in 1932 and did not return to its 1918 level until 1960. In a recent study Carmen Reinhart and Ken Rogoff find that public-debt burdens of less than 90% of GDP have scant impact on growth, but they do see a significant effect at higher ratios. That argues against a single number for all. With the world's biggest sovereign-bond market and trusted institutions, America will be able to carry a higher public-debt burden than Greece.
By the IMF's calculations the United States will require fiscal adjustments of almost 10 percent of GDP by 2030. The federal budget, by comparison, is about 20 percent of GDP.