Deficit Projections Spur Debt Fears

The Congressional Budget Office is predicting a $1.2 trillion federal deficit for 2009, a record both in dollars and as a percentage of the gross domestic product. Many people are concerned high deficits will push overall debt levels dangerously high.

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MICHELE NORRIS, host:

And as you heard in this worrisome present, one number that jumps out is that trillion dollar deficit for 2009. It's got fiscal conservatives, including some in Mr. Obama's own party, fretting about the dangers of even more red ink in the future. And NPR's John Ydstie is here to talk with me about this. First of all John, we're talking really big astronomical numbers. How dangerous is this deficit? Should we be spending all this money?

JOHN YDSTIE: Well, I think most economists and policy makers think the stimulus is necessary. Even some big deficit hawks like David Walker, the former comptroller of the United States, say the government needs to spend money to stimulate the economy. And the reason is that if we don't, the economy could struggle for years. That would mean fewer people have jobs and fewer businesses are making profits so there'd be less tax revenue, and the government would be spending more on things like unemployment benefits. All that would boost deficits, too. So, being stingy now could leave us with high deficits and a sluggish economy for years.

NORRIS: Now, John, let's put that trillion dollar deficit in context. We have to get used to saying that trillion with a T. How do they compare with previous deficits?

YDSTIE: Well the $1.2 trillion deficit for 2009 is a record both in terms of dollars and as a percentage of gross domestic product, which is the total economic output of the country. That percentage is the number economists focus on. The previous post-World War II high was reached back during the Reagan administration when deficits reached six percent of GDP. This year's is projected to be about 8.3 percent of GDP, and that doesn't count spending for the stimulus package.

NORRIS: Now when you talk about eight percent or even just a little bit more, that really doesn't sound like such a huge number.

YDSTIE: Well, it doesn't, but just think about it in terms of your family budget. If you spend eight percent more than you earn every year, you could end up with a lot of debt, and debt is what's important to the U.S. government, too. All the annual deficits end up as part of the government's total debt, and as we know in our personal lives, if our debt gets too high compared to our income, that's not good.

NORRIS: So is the U.S. government's debt now at dangerous levels?

YDSTIE: I think most economists would say not yet. Right now, it's equal to about 40 to 45 percent of GDP, and that's about the same as European countries like the U.K. and France. Germany's is a little less, but it's a level that bears watching because the higher it gets, the more investors who lend the government money begin to worry. Is the government going to be able to pay them back? Is it going to begin to print money to make the payments, causing inflation and reducing the value of the payments to the investors?

NORRIS: So if you're talking about 40 to 45 percent of GDP, if that's not dangerous, what would be considered a dangerous level of debt?

YDSTIE: I think a couple of good examples are Greece and Italy. They have debt levels that equal about 90 percent of the output of their economies, and that means investors require both the governments and the people in those countries to pay higher rates of interest on loans. That means there is less investment by businesses, fewer jobs created, lower wages, higher mortgage rates, and that's not a situation Americans want to face.

If we continue to have trillion dollar deficits for years to come, we could face that situation, especially if the economy isn't experiencing healthy growth. What Barack Obama is betting is that by spending government money now, he'll get the economy growing, again. People will go back to work, tax revenues will rise, and the ratios of deficits and debt to GDP will go down, again.

NORRIS: We don't have a lot of time here, but what about this argument that spending on entitlements, Medicare, Social Security and the like, will actually force deficits up, again, in the future?

YDSTIE: Well, that's right, they will, and Mr. Obama surprised some people yesterday saying he's going to address that problem head on. He said he'll outline a framework for controlling spending on entitlements next month.

NORRIS: Thank you, John.

YDSTIE: You're welcome, Michele.

NORRIS: That's NPR's John Ydstie.

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