Hefty price for U.S. debt
John B. Taylor served as an economic adviser to Presidents Gerald Ford, George H.W. Bush, George W. Bush, presidential candidate Bob Dole and the Congressional Budget Office. From 2001 to 2005, he was undersecretary of the Treasury for International Affairs, where he was responsible for U.S. policies in international finance.
He is the Mary and Robert Raymond professor of economics at Stanford University and the Bowen H. and Janice Arthur McCoy senior fellow at the Hoover Institution.
We talked by phone Wednesday about the impact of the growing national debt.
Q: Sixty percent of people sampled in a recent Peter G. Peterson Foundation survey said they considered the $11.9 trillion national debt to be a big threat to the country. Why should we be worried?
A: Because it's growing at a more rapid rate than it has in virtually any other time in our history with the possible exception of World War II, and it's expected to grow even further in the future.
That puts a burden on future generations to pay interest on that debt. It makes it likely that inflation will pick up. It makes it likely that interest rates will start to rise. So there's a number of reasons to be concerned, and I think people are correct to be identifying that as a serious problem we're facing right now.
Q: The director of the Congressional Budget Office has told Congress that, under current law, the federal budget is on an unsustainable path because federal debt will continue to grow much faster than the economy over the long run. CBO is predicting it's likely to increase from 41 percent of GDP in 2008 to 82 percent of GDP in 10 years. What kind of an impact would that have?
A: Just in the next 10 years, if it raises our debt so much, from roughly around 40 to roughly around 80, that's doubling it. ... GDP total production and income measures how much we can service the debt. So what that means is that something has to give. You have to find a way to control spending. Tax increases will not do it -- it couldn't possibly generate that much of a gap with tax increases -- and then the other possibility is inflation rising, which is a concern.
Q: You've said inflation could help bring the debt-to-GDP ratio down to the 2008 levels but that would mean a doubling of prices. Even in the most robust economy, it would be hard to imagine a 100 percent inflation rate.
A: I think that would be a mistake, in my view. Having inflation pick up is one of the possible consequences, one of the possible harmful consequences, of reducing the debt burden. But if you took and doubled the prices, that would make the debt less onerous but it would also create enormous harm to our country. We'd have ... more crises and it would be like the late '60s and '70s where we had many recessions and big recessions.
Q: Between September and October of '08 the debt increased nearly $1 trillion. Much of the borrowing was related to the Wall Street bailout, according to the Treasury. Thomas Jefferson believed that loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible. Do you think we've turned a corner here?
A: We are turning the corner. We can get it straightened out if we focus on it and if more people realize what a difficult problem it is. ... If the debt goes as high as CBO and others are projecting, it will be a burden of severe magnitude. So Thomas Jefferson was right. Alexander Hamilton was right. We need to get our fiscal house in order and get it done fast.
Q: You've brought your granddaughter to some of your classes to help put a face on the consequences of the debt.
A: People can look at charts and they can think of trillions of dollars, and sometimes your eyes glaze over. But if you actually see a person who is in a future generation -- my granddaughter is just 5 months old. I brought her in as kind of a guest lecturer to look at the charts with everybody. It really made the students realize, "Hey, this is more than charts and numbers. This is people."
Q: We're not the only people who are in trouble with borrowing. The IMF (International Monetary Fund) reports that among G-20 nations, Japan's debt could increase to 225 percent of GDP next year and Britain is struggling. Is there a tipping point for this?
A: There is a tipping point. We don't know where it is. You never know that in economics or politics, but at some point the debt gets so high that interest rates start to move, the dollar starts to fall, people don't want to buy the debt. Japan is an example of how things can go wrong.
Q: And China is buying a lot of our debt, right?
A: China is one of our main creditors, and that raises other issues, right• Because your foreign policy now has to take account of the fact that we would like China to buy more of our debt, and so we have the secretary of the Treasury and the secretary of State asking China to lend to us more. And that's not a good position for foreign policy when we have so many other security issues and political issues at stake.
Q: Could this be a big issue in the 2012 elections?
A: It very well could be. I think there's sort of a race between this and the economy. And they are, of course, quite related. What usually happens in cases of high debt levels is that it begins to hurt slowly, and so that's not the kind of thing that will rush to the front of the table for a particular election. But we'll see. Things can be different.