President Obama: There Is No Debt Crisis!

Posted on March 14, 2013 by


That’s the headline of this report from ABC News.  Today, the U.S. National Debt is $16.7T, whereas our 2012 GDP was $15.6T, or our debt/GDP ratio is 107%.  Economists Carmen Reinhart and Ken Rogoff  have shown that when debt levels are greater than 90% of GDP (for advanced economies), economic growth slows.

EDIT Jun ’13:  There has subsequently been much controversy over a spreadsheet error in R&R’s calculations for the 90% # highlighted above.  Despite this error, the general conclusion still seems to hold, higher levels of debt lead to lower growth as an empirical if not a causal factor.  The important point for our discussion is not 90% as the correct #, but rather the higher the debt it becomes increasingly more difficult to do debt service. All of my points below still hold…

Further, they note in This Time Is Different (p. 289) that it is critical to understand the true government debt, “ideally including contingent liabilities.”  It is both the direction of our debt (continuing large deficits) and the implicit liabilities of our unfunded social promises (CATO estimates $120T) which make this a debt crisis.  We have to get to the point where our economy grows faster than the growth in our federal debt–and right now we’re not anywhere close to that.  As I’ve suggested in earlier posts, this is “not a debt crisis” today primarily due to the Fed’s monetization of our debt.  If we had to pay normal interest rates we would already be potentially facing major social unrest–as there would be significant real cuts, not just cuts to planned growth.  Further, do we not have any moral concern when the government is openly engaged in Financial Repression, punishing savers to further government consumption?  This will not end well; as Reinhart and Rogoff note, “Some crisis episodes…were stretched out even longer by the authorities by a lengthy period of denial (emphasis added).”  We need to stop the denial and deal with this problem.

It is reasonable, even if I disagree, to say that we don’t have a spending problem–because you can still say logically that you have a revenue problem instead.  But to deny we have a debt problem when we’re already at levels far higher than considered acceptable (Maastricht Treaty required debt/gdp < 60% for example) seems incredibly foolhardy.  Can we not do better?

What do you think?