Last Updated May 28, 2010 2:34 PM EDT
As I have argued before, the U.S. is not Greece for a variety of reasons. But there will be much more talk, as the national debt clock ratchets ever-higher, over how much debt is too much, most notably in the commission on debt control that President Obama created.
The totemic document for the coming debate over the appropriate debt level is turning out to be "Growth in a Time of Debt" (PDF), a recent paper by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard. It discusses how government debt levels have affected economic growth in a variety of countries over a long period. Though it leaves aside the intriguing question of how slow growth amplifies a debt burden, Reinhart and Rogoff, both influential economists with impeccable reputations in their field, concluded that a level of 90 percent of government debt to GDP is a dangerous thing. Reinhart said in testimony to the presidential commission on Tuesday:
At or above 90 percent, growth deteriorates markedly, with median growth rates falling by 1 percent, and average growth rates falling considerably more. Surprisingly, we find that the threshold for public debt is similar in both advanced countries and emerging markets.You can expect a lot of hyperventilating about this 90 percent number, since the U.S. gross federal debt load was 83.4 percent of GDP at the end of fiscal year 2009. (Most economists prefer to measure debt held by the public, since it factors out intra-governmental transactions; that number is a less scary 53 percent.) But hold on before raising taxes or grabbing a machete to whack away at federal expenditures.
For starters, Reinhart once told me explicitly that the 90 percent number is not necessarily one the U.S. should shoot for. As she pointed out, the paper she wrote with Rogoff was an analysis that concluded, no matter how you slice the data, growth seemed to take a hit once you reach 90 percent. That is not the same thing as a recommendation to policymakers, who have to balance debt with the all-important growth question.
Also, the paper includes the martini-dry but very important caveat that "debt thresholds are importantly country-specific." In plain English: a country whose government debt is the very definition of creditworthiness (the U.S.) has a lot more leeway to run up debts than one with a history of deficit, debt and default (e.g. Greece).
The point here is not that the United States need not think about deficit reduction -- once the economy has found its footing. It does. But beware of simple answers that would lead to an overreaction. The U.S. remains in a class by itself. Predictions of a crisis like the one in Greece are much exaggerated.