The numbers are big enough to get the attention of even the most experienced New York Stock Exchange trading specialist or jaded Washington public policy lobbyist: a $192.3 billion federal budget deficit for March and a nearly $1 trillion deficit . . . for just the first six months of fiscal 2009.

That latter total is more than double last year's record $454.8 billion deficit, due to fiscal stimulus and bank bailout spending, the U.S. Treasury Department announced. Although the high total was expected -- the Congressional Budget Office has projected a similar mid-year gap days earlier (pdf) -- the total has alarmed some in public policy and financial circles.

The question is, other than the typical, anti-government-spending lobby, should you be concerned by the large total, in and of itself?

The key: Debt as percentage of GDP

Not so, says New York Times (NYT) columnist and economist Paul Krugman. Appearing on on ABC's "This Week with George Stephanopoulos" Sunday, Krugman said the key statistic remains the national debt as a percent of U.S. GDP. Large budget deficits -- even deficits above $1 trillion for consecutive years -- are needed, short-term, to help create demand and pull the U.S. economy out of its pronounced recession.

Long-term, Krugman underscored that the national debt can become a problem, but the United States, with a national debt totaling about 60-65 percent of GDP, is nowhere near levels approaching the "danger zone." For example, Japan ran a national debt equal to 100 percent of GDP in the 1990s, Krugman said.

Krugman also reiterated Sunday his support for a second, major fiscal stimulus package -- one he believes will be needed to fill the large demand hole created by the recession.

Fiscal Policy Analysis: I'm going to differ ever so slightly from Krugman (though this is generally not recommended) and argue that both the budget deficit and national debt are reaching levels of concern. The Obama administration forecasts that budget deficit will total $1.5 trillion deficit this year and fall to $533 billion in fiscal 2013. I'm concerned about the possibility of China becoming impatient with U.S. deficit reduction and selling U.S. Treasuries for any number of reasons (inflation worry, asset diversification, geopolitical stance). That's a tactic that would increase long-term interest rates in the United States. So far, China has been patient, but I'm concerned the United States is becoming more vulnerable to a sudden large sale of Treasury bills, by China and others.

Accordingly, after the U.S. recovery is in place, no more than six months later Congress should begin to cut the deficits, which means spending cuts (including entitlement reform) and tax increases (particularly on upper income groups).


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