Should debt reduction be Washington's top priority?

To follow is an excerpt from the CQ Researcher report "National Debt" by Marcia Clemmitt on March 18, 2011.

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Rising government debt is damaging the U.S. economy, say conservatives. “We're broke. Broke, going on bankrupt,” and “just as a bankrupt business has trouble creating jobs, so does a bankrupt country,” said House Speaker John Boehner, R-Ohio. [Footnote 11]

But many economists say the economic recovery is still too fragile to withstand severe cuts in government spending. For the next year or two, government should keep spending to create demand for goods and services — demand that private buyers can't yet supply, says Syracuse University's Palmer.

Yet, conservatives argue that the debt is the nation's biggest threat and must be cut now. “Our debt is a threat to not just our way of life, but our national survival,” said Sens. Mike Crapo, R-Idaho, and Okahoma's Coburn. “We are already near a precipice. In the near future, we could experience … hyperinflation” — a rapid decline in the dollar's value that could occur if investors lost confidence in America's ability to pay its debts, they said in a statement. [Footnote 12]

“The government's too damn big,” and large cuts must begin now, said former Minnesota Gov. Tim Pawlenty, a potential 2012 GOP presidential hopeful. [Footnote 13]

Helping focus Republican lawmakers on debt is the surging influence of the Tea Party movement, which opposes public debt. “I've chopped my credit cards. I'm watching my spending. This country needs to do the same,” Texas retiree Carter Brough declared at a Tea Party conference in Phoenix in February. [Footnote 14]

Economists widely agree that allowing the national debt to balloon compared to GDP involves risk. Interest on ever-increasing debt soaks up money that could go to better purposes, and a huge debt may make investors worry that the U.S. economy is weak.

“There are increasing questions about the rest of the world's appetite for U.S. debt, as the United States has changed from a net creditor country in 1980 to a vast net borrower,” wrote Alan J. Auerbach, an economics professor at the University of California, Berkeley, and William G. Gale, chief federal economic policy analyst at the Brookings Institution, a centrist think tank in Washington. [Footnote 15]

While investors would probably lose their appetite for U.S. Treasury bonds only gradually, “the history of financial markets suggests … that shifts in investor confidence can be sudden,” wrote economics professors Laurence Ball of The Johns Hopkins University and N. Gregory Mankiw of Harvard. Such a shift could lead investors suddenly to demand much higher interest rates in exchange for lending money to Washington, they said. [Footnote 16]

“Right now, the U.S. is the best-looking horse in the glue factory,” with investors viewing U.S. Treasury bonds as the safest government vehicle in a world replete with troubled economies, says Joseph Minarik, senior vice president and research director at the Committee for Economic Development, a nonpartisan, business-led think tank in Washington. At present, “you may well say, ‘If the U.S. isn't a good place to park your money, there is none.’” Nevertheless, Minarik says, “if Europe gets its act together, if China becomes more mature,” they could easily become more attractive places for investors. “At the rate we're going, we're deteriorating a lot faster than some other places.”

Liberal lawmakers and many economists argue that spending to push the economy back on track is still job one, however.

The danger from today's federal debt “is zero,” as evidenced by the fact that Treasury bond investors aren't demanding high interest rates, declared James K. Galbraith, a professor of government at the University of Texas, Austin. “If the markets thought that [the deficit] was a serious risk, the rate on 20-year Treasury bonds wouldn't be [a low] 4 percent and change,” he said. [Footnote 17]

What would be a serious risk, some argue, is a sharp cut in federal spending amid a weak economic recovery. “From President Hoover in the Great Depression to global responses to the East Asia crisis in the late 1990s [when nations beginning with Thailand suffered financial meltdowns], it's clear that government cuts weaken economies rather than alleviating malaise,” wrote Joseph E. Stiglitz, a liberal Columbia University economist and 2001 Nobel Prize winner. [Footnote 18]

Syracuse's Palmer and Rudolph G. Penner, a senior fellow at the Urban Institute, a centrist think tank in Washington, argued that economic stimulus and debt reduction could occur simultaneously — if the debt-reduction moves are implemented gradually. “We could easily continue some short-run stimulus while immediately announcing reforms in Social Security or in health programs,” for example, to phase in “slowly beginning in, say 2012 or 2013,” they wrote.

The Issues
* Should debt reduction be Washington's top priority?
* Should Congress raise taxes to help cut the national debt?
* Is Social Security a cause of rising national debt?

Click here for more information on the CQ Researcher report on "National Debt" [subscription required] or purchase the PDF.

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Footnotes

[11] Quoted in Bob Smietana, Tennessean.com , Feb. 28, 2011, www.tennessean.com/article/20110228/NEWS02/102280350/-1/RSS03/House-Speaker-John-Boehner-says-debt-sign-moral-failure.

[12] “Senators Coburn, Crapo Announce Support for Debt Commission Plan,” press release, website of Sen. Tom Coburn, Dec. 2, 2010, http://coburn.senate.gov.

[13] Quoted in Marc Lacey, “Tea Party Group Issues Warning to the GOP,” The New York Times, Feb. 26, 2011, www.nytimes.com/2011/02/27/us/politics/27teaparty.html.

[14] Quoted in ibid.

[15] Alan J. Auerbach and William G. Gale, “The Federal Budget Outlook”, Brookings Institution website, Sept. 17, 2010, www.brookings.edu/papers/2010/0917_federal_budget_outlook_auerbach_gale.aspx.

[16] Laurence Ball and N. Gregory Mankiw, “What Do Budget Deficits Do?” paper prepared for Federal Reserve Bank of Kansas City, 1995, www.kansascityfed.org/publicat/sympos/1995/pdf/s95manki.pdf.

[17] Quoted in Ezra Klein, “Galbraith: The Danger Posed by the Deficit ‘Is Zero,’” The Washington Post Blogs, May 12, 2010, http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html.

[18] Joseph E. Stiglitz, “Turbulence Ahead,” Truthout blog, Jan. 24, 2011, www.truth-out.org.