The U.S. Department of the TreasuryWhat's a concerned citizen to think? On one side, respected economists like Paul Krugman are warning of "deficit hysteria" -- that the concern over rising federal debt is not only unfounded but counterproductive. On the other side, equally well-regarded economists such as Kenneth Rogoff and Carmen Reinhart have testified to Congress that high debt levels (90% of GDP and above) lead to substantially lower growth in the future.

Now that the U.S. debt is 96% of GDP and pushing higher by the day, the debate is no longer academic.

'Firmly In the Keynesian Camp'

The two camps can be divided into those who are so-called Keynesians, who believe that the government should borrow and spend freely to lift the economy out of recession, and those who are skeptical that Keynesian stimulus is actually doing anything other than creating a mountain of debt that will burden the nation and its taxpayers for decades to come.

President Obama is firmly in the Keynesian camp, endorsing another $140 billion round of additional stimulus spending.

But resistance to such endless stimulus is rising in Congress, as many fear the U.S. is on the same unsustainable path to rapidly ballooning indebtedness that's been blazed by Greece and other European nations.

Debt and Deficit Facts

To cut through the political posturing on both sides, let's start with the facts of deficits and debt.

1) The U.S. is running extremely high deficits, by any measure. The total deficit for fiscal 2009 was $1.42 trillion, a $960 billion increase from the 2008 deficit. Estimated tax receipts for fiscal 2010 are $2.3 trillion, spending is $3.5 trillion, for an estimated deficit of $1.2 trillion. The 2009 budget deficit was 12.3% of gross domestic product, the largest share since World War II.

As a percentage of actual revenue, the 2009 deficit was a staggering 42% of all revenues.

2) U.S. external debt is roughly $14 trillion, or about equal to the gross domestic product.

External debt is that part of the total debt in a nation that is owed to creditors outside the country. This is not "debt we owe ourselves," it's debt we owe others outside the U.S. The $14 trillion includes both public debt (the debt owed by the federal government), local and state government debt, plus private debt such as corporate loans.

3) The U.S. Treasury divides the public debt into two categories, which can create some confusion about the size of the federal debt. The Treasury calls the federal debt owned by other governments' central banks, mutual funds and individuals the "debt held by the public." That is currently about $7.8 trillion.

Another $2.2 trillion is IOUs issued to the Social Security Trust Fund. In essence, the government "borrows" the annual surpluses from Social Security and issues a non-marketable bond to the trust fund as an IOU. But since the security isn't marketable, it has no real value and is just an accounting placeholder to keep track of how much money the government has transferred of the Social Security surpluses.

4) Of that $7.8 trillion in debt held by the public, about half ($3.95 trillion as of April 2010) is held by foreign central banks. That's up from $3.3 trillion in May 2009.

5) Nations with high savings rates such as Japan can have a very large national debt, but the amount of that debt held by foreigners is modest (external debt is about 42% of GDP in Japan and a mere 7% of GDP in China, which has a savings rate of 38%).

'Substantial' Interest on the National Debt

The interest on the U.S. national debt is substantial, roughly $400 billion a year, even with today's super-low interest rates. The concern is that if and when rates rise, the interest payments will quickly squeeze other government spending, or trigger a spiral of higher borrowing to pay higher interest, which then creates higher interest payments in the future, forcing more borrowing, and so on.

This scenario is just what a report issued by the Bank for International Settlements, The Future of Public Debt: Prospects and Implications, foresees as likely as nations face the increasing costs of rapidly aging populations and the increasing likelihood that higher interest rates going forward will push up the cost of servicing existing debt.

The BIS isn't alone is flashing warning signs. The Government Accountability Office, the federal government's auditing agency, concluded that the U.S. is on a fiscally unsustainable path.

The foundation of the Keynesian philosophy of fiscal management is that stimulus government spending would eventually pay for itself in future growth. But as the BIS and GAO studies show, ballooning debt levels end up seriously depressing growth.

Not Supported by this Recession's Evidence

The Keynesian faith that sustained, massive deficit spending will "borrow and spend our way out of recession" isn't supported by the evidence of this recession. The past two years of gargantuan deficit spending have shown that the government that spends more doesn't necessarily gain more in tax revenue.

By the government's own accounting of "jobs saved/created" by the stimulus spending, the cost per job is about $300,000 -- hardly the kind of result that promises future growth once government stimulus ends.

Lastly, the federal government isn't being entirely forthright in its accounting of debt and liabilities. The government effectively owns the government-sponsored mortgage agencies Fannie Mae and Freddie Mac, which may end up costing the taxpayers up to $1 trillion in future losses, by recent estimates.

Add up the $1 trillion-plus annual deficits, the rapidly rising debt, the off-balance-sheet losses generated by Fannie, Freddie and other bailouts, the hundreds of billions of dollars owed every year in interest, and the modest results of all the stimulus spending to date, and you get some fact-based reasons to doubt the Keynesian faith.

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