Spending in a Time of Debt

Spending in a Time of Debt

Veronique de Rugy | Nov 27, 2012

This chart shows projections of the gross federal debt, which consists of debt held by the public and government accounts such as Social Security and Medicare trust funds. At $16.3 trillion, our current gross federal debt represents more than 100 percent of gross domestic product (GDP) by the end of FY 2012. As if that fact weren’t disconcerting enough, the debt is projected to grow in the future, along with the interest payments on it.

Past a certain point, the debt becomes so large that economic growth begins to slow—a fact that is well known among economists. Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff made this relationship apparent in their 2010 study.

Policymakers know what needs to be done. Many economists—including Alberto Alesina and Silvia Ardagna of Harvard University and Paolo Mauro of the International Monetary Fund—have found that the surest way to rein in the debt is to cut spending, not increase revenue. That means that any serious negotiations about the so-called fiscal cliff will have to address the need to cut spending on the long-term drivers of the debt, namely entitlement programs and government employment.

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