Saturday, June 05, 2010

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%.
Read the rest here.

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