Dec. 15, 2012
President Barack Obama has proposed saving more than $4 trillion over the next decade in his "fiscal cliff" talks with Republicans. GOP House Speaker John Boehner has offered a comparable figure, and two years ago an influential bipartisan commission headed by Democrat Erskine Bowles and Republican Alan Simpson suggested $4 trillion as well.
What's so special about that number? Nothing really, say many economists. The real key is preventing the enormous $16.4 trillion debt the government owes from growing faster than the now $15.8 trillion U.S. economy.
Following is a look at the issues surrounding the fiscal cliff, a wave of broad tax increases and automatic spending cuts that begin with the New Year...
Does the government have a good record of controlling the debt?
Not in recent years, thanks in part to the recession of late 2007 to 2009 and low economic growth since then. Annual deficits mushroomed because the economy slowed the growth of federal revenue even as it prompted higher federal spending in efforts to spur employment and help low-income people.
As a result, the national debt -- the cumulative money the government owes -- exceeded the $15.8 trillion size of the entire U.S. economy this year. The last time that happened was 1947, when the government was still repaying its debts from fighting World War II. In contrast, since the mid-1950s the debt has remained less than 70 percent of the size of the economy -- usually well under that -- until 2009.
At what point is the ratio too high?
Economists disagree. A study of historic data for 44 countries by economists Carmen Reinhart and Kenneth Rogoff found that nations whose debt exceeded 90 percent of the size of their economies tended to see economic growth slowed by a full percentage point -- a damaging reduction no country wants to see. Other experts say there is no clear cutoff point and cite that unpredictability as part of the problem.
"The trouble is you'll know you hit it when interest rates explode and we're in a crisis like they are in Europe," said William Hoagland, a senior vice president with the Bipartisan Policy Center, a private group that seeks policies both parties can support.
Read the full article here.
Economic Policy Project