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America’s Hidden Debt

While America's fiscal hawks and doves disagree about the sustainability of US government debt, they both accept the standard measure of it as accurate. This is a mistake, and possibly a catastrophic one.

WASHINGTON, DC – Former US Secretary of the Treasury Lawrence H. Summers recently quipped that, “Fiscal stimulus is like a drug with tolerance effects; to keep growth constant, deficits have to keep getting larger.” People like Summers worry about deficits because they doubt that the money the government is borrowing is being spent in ways that will push the long-term growth of GDP above that of the debt. Unless the mix of spending changes, the debt-to-GDP ratio will continue to grow, foretelling disaster.

Others do not share such concerns. On the political left, Nobel laureate Paul Krugman, for example, argues that for “a country that looks like the United States, a debt crisis is fundamentally not possible.” On the right, John Tamny, Forbes’ political economy editor, says, “Ignore the endless talk of doom, budget deficits really don’t matter.”

But while judgments differ about the sustainability of US government debt, they both accept the standard measure of it as accurate. This is a mistake, and possibly a catastrophic one.

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