America, its public debt and the world economy

Photo/Mike Lovett

George Hall

Last year, as the European debt crisis generated headlines and raised concerns worldwide, the U.S. national debt quietly grew to more than $18.8 trillion, its highest level ever.
George Hall, the Fred C. Hecht Professor of Economics and chair of the economics department at Brandeis and Brandeis International Business School, sat down with BrandeisNOW recently to calculate the impact of America’s debt on the international economy and U.S. domestic policy.
What is the current status of our country’s debt?
It’s not a crisis. There is high demand to buy American debt, and we are able to sell it at very favorable prices. There is a shortage of safe assets in the world, and American debt is the safest of all assets. There are some concerns about the debt, but they are in the long term, between 10 and 20 years into the future.

What makes American debt a safe asset? 

There aren’t many safe places in the world to store wealth. You can put wealth in stocks, for example, but stock prices go up and down. If you are, say, an investor in China and want a safe place to put your money, you might opt for treasury securities. As an investor, you can store your money there and see it returned to you within one to three years.
Speaking of China, how do America’s relations with China affect our debt?
We have a strong relationship with China, and that goes both ways. They want what we produce, which are safe assets, like debt. And we want what they produce, which are goods, like televisions. We buy a lot of goods from them, and, in turn, they buy our assets. That’s a stark, simple way of looking at it, but they need us as much as we need them.
Have you seen any changes in how the U.S. manages or issues public debt?
We’ve broken precedent by making long-term promises that should be tax-financed but aren’t. It makes sense to pay for short-term expenditures with debt. But long-term promises that are made year after year, like medical benefits, should be paid for with taxes. Deciding to pay with debt is new.
It’s also interesting that the Treasury Department wants to take advantage of long-term interest rates and issue long-term debt to lock in on those low rates. That’s the opposite of what the Federal Reserve has done, which is attempt to stimulate the economy by buying those long-term assets. So the Federal Reserve and Treasury Department are at cross-purposes.
In light of the challenges facing Puerto Rico and several European countries, can we expect debt crises to become the norm?
Our country will be the last to go into a crisis. Europe is much more vulnerable than we are, so European states would go first. If we went into a crisis, the whole world will, too; that will be scary.
But debt crises go back further than the history of the U.S. We’ve been lulled into a sense of complacency that these things are under control. Recent events remind us that problems we thought we’d fixed long ago are still with us. We thought new fiscal rules and new political structures like the eurozone would fix debt problems, but they haven’t.
What does all this mean for the U.S.?
I don’t see a doomsday. What’s more likely is that we get stuck in a rut where we have very high taxes largely going to pay for expenditures from years past. You’ll end up in a decade of slow growth and limited opportunity because the government’s hands get tied.
The sooner you tackle these issues, the lower the cost will be. If we decide to wait to raise taxes, the tax increases will be much larger. And if we wait to cut benefits, particularly to older people, the cuts will need to be bigger, which could mean that citizens will have less time to prepare.

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