Economy

While much of the debate surrounding the Obama administration’s decision to delay a Treasury Department report on China’s currency practices, has defined the decision as a trading China’s help with Iran for benefits to the American economy, the decision is mostly about effectively achieving revaluation of China's currency. The report, which might have (accurately) labeled China a currency manipulator, would have been another bump – this one likely fairly major – in the already strained U.S. – China relationship. Instead, the decision to pursue the currency issue through the G-20 and other diplomatic avenues should be seen not as a concession by the U.S. but rather as the more appropriate, intelligent, and ultimately effective means of pursuing necessary economic adjustment in a changing global economy.

While politically convenient and satisfying on some levels, declaring China a currency manipulator, thereby unleashing a set of political and legal actions, would likely have backfired. The Chinese are clearly unwilling to make policy changes that come as a result of direct, vociferous, public pressure from foreigners, especially the United States, so the report would have set back the effort as opposed to push it forward. Continuing down the path the report would begin by imposing a retaliatory tariff on Chinese imports and risking a trade war would be dangerous, especially as the American and global economies remain vulnerable to additional shocks.

There is already strong domestic debate within Chinese leadership on the issue. It looks like it is only a matter of time until there is some revaluation of the RMB. Indeed, RMB futures responded bullishly to the news, conveying a belief that the administration’s strategy makes it more likely that China will move in the right direction. Secretary Geithner’s visit to China is another sign that the move is paying immediate dividends in the relationship, and recent signs illustrate that it is likely only a matter of time until China makes a policy change.

Because the greatest victims of China’s currency practices are not Americans but instead other emerging economies, the administration’s decision to pursue diplomatic action through the G-20 makes sense. The G-20’s membership incorporates nations far more affected by China’s currency practices than the U.S. In that light, the administration’s decision last year to double-down on the G-20 in lieu of the G-8 seems all the more prescient. 

While China’s currency practices are a convenient scapegoat for fears about a changing global economy, this situation also requires a bit more perspective than some are taking today. While the Chinese currency practices are certainly untenable – both for the US and for China – a revaluation of the RMB is unlikely to have significant, short-term economic impact or alleviate America’s economic woes, and Americans will continue to buy cheap consumer goods from other low cost economies (just other low cost economies, which is why China’s currency policy hurts others more than it hurts the US). It’s also important to note that country by country balance matters far less than our global trade balance. 

Fundamentally, the rise of China and many other emerging economies will ultimately suit America’s values and economic interests, as new markets open, and billions emerge from poverty and enter the global middle class. The transition into this new global economy will be bumpy, but the Obama administration’s response of investing in diplomacy through more representative international institutions conveys an appropriate response to these changes and an understanding the most effective, if not the most emotionally satisfying, stewardship of America’s place in the global economy. 

Looking out onto the smoky, endless skyline of Seoul, Korea, I think about our two nations’ similar economic paths, from abject underdevelopment to world-class modernization and wealth. In the 19th century, there was one place in the world that managed to move all the way up from low-income to high-income, and that was the United States. From 1870 to 1970, another society, Japan, managed the same achievement. Now, one other society will make the same great leap from 1960 to 2030 or so, and it will be Korea. If you doubt it, consider that since 1960, the real per capita income of Koreans has grown 37-fold, and the country’s real GDP has expanded up 50-times. They’ve managed it in much the same way we did – making huge, sustained investments in education and infrastructure; sustaining a voracious work ethic animated by meaningful jobs open to anyone able to perform them; adopting astute policies that support native businesses but also expose them to foreign competition from more advanced rivals; and setting global ambitions for the nation’s economy. 

Yet, even these achievements by Korea in this period and by ourselves a while ago don’t guarantee future success. Korean policymakers, businesses and workers certainly all face difficult challenges. But our interest here lies in our own, future path. President Obama and Congress, beset by a series of crises, have found themselves playing the role of a fire brigade. To his genuine credit, the President reached past the fires around him to drive basic health care reforms, a remarkable exercise of presidential will even if we’re unsure of their real costs and benefits. Alas, the achievement represents only a modest piece of a larger economic strategy still waiting to be articulated and carried out, if we are to hope for a better economic future than the one being deeded to most Americans by the mistakes and dismal neglect of the preceding administration.

This is the first of three essays in which we will lay out a new economic strategy for the next decade. The last time such large ambitions were seriously attempted, they it came from conservatives led by Ronald Reagan, who also tried to surmount the emergencies of his time with broader reforms. Perhaps less than half of that attempt proved to be sound, and more than half clearly was not; but they all left long legacies. The big task for Mr. Obama and progressives today is to think and act as big as Reagan, and get at least three-quarters of it right this time.

Today, we will lay out the three basic parts of that task and begin to think through the first of them. These three economic challenges that demand basic reform are: 1) Restore real prospects for economic progress for average working Americans; 2) reclaim real, structural soundness for the government’s finances in the face of the serious social challenges we will face over the next decade; and 3) secure America’s leading role in the global economy.

The first part of this task is the most urgent politically, although not more so economically than the others. In fact, if we do not successfully address the second and third parts, the progress we make with the first will not be sustained. The essence of the first challenge is to ensure that average Americans can lead lives of economic progress and dignity. That aspiration, in turn, rests most fundamentally on restoring strong and dynamic job creation, so that everyone who wants to can not only find work, but also move up periodically to more demanding, better-paid jobs. A labor market that works this way – the kind we had in the 1950s, 1960s, and in the 1990s for a brief while – can deliver the basic elements of the American dream  through meaningful work that provides real opportunities for rising incomes and upward mobility.

Every piece of this goal is in peril today. For a decade, job creation has slowed sharply, income gains for most people have stalled, and upward mobility has become the privilege limited to the top 20 percent of Americans. We all can see the growing gap that has opened up between the skills of most Americans and the demands of most new, well-paying jobs with futures. In one way or another, those jobs all now involve advanced technologies, which themselves also displace other jobs for millions of people. Finally, we can feel the pressures that squeeze so many jobs and wages, as businesses dealing with the intense competition created by globalization also face fast-rising costs, especially for health care, energy, and pensions. 

These forces gripping American jobs and wages are all very complex, and there’s no single magic bullet to vanquish them. So, we have to take them on piece by piece. For example, most new jobs come from relatively young businesses that are expanding quickly. We can ease some of the costs of creating those jobs by reducing the employer’s payroll taxes on net, new employees and by assuming part of their health-care costs – approaches actually in place already in limited forms, in the new health care reforms and the latest jobs bill. Now, for some real innovation, let’s also require that in exchange, these businesses become staging grounds for enhancing the skills of the new workers they hire. Half of what they save on payroll taxes and health care would go for onsite training or vouchers for ongoing outside instruction, especially in the information technologies that pervade most workplaces. For everybody else, new grants to community colleges could cover the cost of keeping their computer labs open and staffed on evenings and weekends, for anyone to come by and receive free training in those technologies.

These reforms, however, won’t ease the cost pressures squeezing jobs and wages in most companies. So this plan also needs additional steps to reduce the fast-rising cost burdens on business from health care, energy and pensions. One sensible step that may seem radical by today’s cramped standards would be to lighten those pension and health care burdens by (the radical part) expanding Social Security and Medicare. Start by raising the benefits of those who continue to work beyond ages 62, 65 and 70, which will directly reduce their employers’ pension liabilities. Follow it up by the government assuming the obligations of many large companies for part of their retirees’ health care. It might amount to federally-financed “medigap,” a social provision which eventually progressives should want to extend to everyone.   

It shouldn’t surprise anyone that addressing the profound problems most Americans now face with jobs and wages won’t be cheap. Next week, we will lay out the second part of our progressive economic strategy, on how best to restore sound financing for the national government. Progressives did that in the 1990s, with some help from conservatives, and they can do it again. This time, however, we also have to tackle the looming costs of two structural challenges to our future fiscal state, namely, health care for the retiring boomers and climate change. Then, in part three, we will turn to America’s ongoing leadership in the global economy, especially with regard to our strength as the source of innovation worldwide and our central place in the global financial system.

We have a really serious problem with job creation. It’s been more than a half-year since the economy began to grow again – including several months of very strong, stimulus-fueled gains – but private sector employment continues to fall. The truth is, these results shouldn’t surprise anyone with a long memory. While businesses began to create more new jobs than they destroyed within three months of the end of the 1981-1982 recession, that didn’t happen for a full14 months following the 1991 downturn and for more than two years after the 2001 recession.

The problem this time looks even more daunting. The economy is growing, but the pace may be moderating already. That’s because this time, most Americans have lost part of their savings and part of their homes’ value, leaving them more cautious about going on the kind of spending spree that used to drive early recoveries. And when people are cautious, businesses are too – with the result they don’t hire much. To get job creation going, we have to restore confidence so people and firms will begin spending again.  

We also have to deal with a deeper problem linked to globalization. In a world with tens of thousands of new businesses created across the globe over the last decade, the resulting, intense competition forces companies to hone their efficiency and control their costs much more stringently. And when their costs for, say, health care and energy go up, they often have to cut back somewhere else – and they usually start with jobs and wages. That’s why U.S. companies created less than half as many new jobs, relative to how fast the economy grew, during the last expansion as they did in the 1990s and 1980s. To change these dynamics, we’ll have to slow the inflation in health care and energy prices. The President’s reforms enacted last week are a modest first step; but millions of jobless Americans can’t afford to wait for them to take hold.

They don’t have to: We have developed a four-part program that would substantially accelerate job creation over the next several years. First, President Obama and Congress should make it cheaper for companies to hire new people. The most direct way to do that is to suspend the employer’s share of payroll taxes for new, net hires in their first year on the job – that would cover all new employees in firms that expand their total workforce and total payrolls. In the second year, the company would pay 50 percent of the employer’s payroll tax contribution. Employees who work hard for those two years will learn how to do their particular jobs especially well, which should be enough for their employers to keep them on after their payroll tax break ends.

The experts at the Congressional Budget Office found that this approach creates more jobs, per federal dollar spent, than any other. In fact, the jobs bill passed two weeks ago includes a light version of this policy, in a seven-month payroll tax holiday for hiring people who have been out of work for a while.  It’s a start; but we need a permanent program, not a temporary fix, and one that doesn’t ask people to stay jobless until they qualify.

Next, the President and Congress should help everyone become a more valuable worker. Look around: Every modern office or factory is organized around computers, the Internet and other information technologies. Yet, nearly half of people working today – and more than half of those out of work – have little or no skills to use these technologies. As we’ve argued and written before, we can help everyone become a more valued employee by providing free computer and Internet skill training – and we can do that, at relatively little cost, by providing grants to community colleges to cover the cost of keeping their computer labs open and staffed at night and on the weekends, so anyone can walk in and receive training. Here, too, the President has said it’s a good idea – so why not enact it now?  

Part three of this program involves more assistance for state and local governments to suspend their continuing layoffs of police, prison guards, firemen, sanitation workers, and other public service employees until a genuine economic expansion begins. This was a good idea for the original stimulus package, and it’s just as good an approach for a jobless recovery. And Wall Street can help pay for it with the revenues from a new tax on the bonuses for executives of financial institutions that took taxpayer money to stay afloat. We saved their jobs; now, they can help save ours.

The fourth part of our package involves the arcane structure of taxation for multinational companies. U.S. multinationals today hold some $1 trillion in financial assets outside the United States, bought with the profits they earned abroad. They keep all that money outside America, because while they’ve already paid foreign taxes on it, they have to pay additional U.S. corporate taxes when they bring those funds home. In practice, we’ll never see most of those funds under current law, since multinationals generally repatriate those profits only when they have domestic tax losses that can offset them. So, Congress at little cost could grant U.S. multinationals one year to bring home these funds and pay a much lower corporate tax rate than normal, so long as they use those funds to create jobs. This approach is the only virtually free stimulus available to us – since the funds come from overseas – and we should grab it.

These four measures won’t change the structure of this recovery or the larger economic environment in which it is unfolding. Yet, within that structure and environment, these steps could significantly enhance the job prospects of millions of Americans.

The health care reforms enacted this week are an unequivocal political triumph for President Obama. He turned back the most intense and dogged partisan campaign to stop a piece of legislation seen in this era, enhancing his own popularity and power until at least the next setback. More important, the reforms as passed constitute the most serious social-policy achievement in two generations. They not only provide a clear and secure route to insurance coverage for two-thirds of the Americans who don’t have it. The President’s reforms also end a sheaf of abhorrent insurance practices – most notably, preexisting condition clauses and lifetime coverage caps – which withhold payment for care when, as it happens, people actually need it most. The open question, however, is whether the reforms also will make the country’s health care system more sustainable by slowing its trajectory of cost increases. 

Without reforms to do so, those prospects are at once scary and unsustainable. A few months ago, I calculated how much an average, middle-class family should expect to spend on health care in 2016: The answer is fully one-third of the family’s real annual income – a level that’s unsustainable both economically and politically. 

Here’s how I figured it out. The Congressional Budget Office tells us that an average family will earn $54,000 per-year in 2016, when moderately-priced family insurance coverage will cost $14,700. Most people’s employers will pay much of that bill; but those payments come out of people’s wages, not the company’s profits. Taking this into account, a middle class family’s earnings in 2016 should come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance. That’s not all. Experts figure that their co-payments and other uninsured expenses, on average, will come to another $5,100 in 2016. They’ll also pay taxes to help cover other people’s health care – 2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $1,500 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax and for the subsidies for the uninsured under the new reforms. Add up all of that, and it comes to $22,766 or 33.3 percent of the middle-class family’s adjusted income of $68,700.

As Harvard health care expert David Cutler and others have concluded as well, the new reforms provide a credible beginning for what will still be a long and arduous process to control cost increases. Here’s how. To begin, the insurance exchanges should reduce costs in the individual and small-group insurance market, while the investments in IT should help slow costs across the system. In the largest and fastest-growing part of health care, treating the fast-rising numbers of older Americans, the reforms also include significant cost reductions in Medicare.  Perhaps most important, Medicare will move from volume-based payments to reimbursements based on the value of the treatments. In addition, the reforms create a new Medicare advisory board to propose new ways to cut costs or save expenses, tied to a process for fast-tracking the recommendations through Congress; and there are also cuts in overpayments for Medicare Advantage and other supplemental Medicare plans, as well as new measures to reduce Medicare fraud and abuse. Finally, there’s a new emphasis on prevention programs, which could significantly reduce future costs. 

All of this will help, but it won’t reduce the share of our average family’s income going to health care by more than a percentage-point or two. To make a bigger difference, each party will have to accept much more difficult changes advanced by its rival.  So, Democrats will have to live with taxing a good share of the value of employer-provided coverage – the only tax increase conservatives will swallow these days – along with malpractice reforms more far-reaching than the limited state-based experiments enacted this week. For their part, Republicans will have to accept a public option, the only way to introduce real competition for insurers in areas where one or two of them now constitute an effective monopoly or duopoly.

Happily, the passage of the President’s reforms this week will make such hard steps much more likely politically, if not any easier. The reason is that with these reforms, the federal government, for the first time, has accepted overall responsibility, and ultimate accountability, for the nation’s health care system. When costs continue to rise sharply, as they will, voters across the country will have Washington as a focus for their displeasure, and the next election as an effective way to express it. That political prospect will drive much more stringent steps to contain costs, as it has in every other advanced country in the world. Only it’s coming later here, which is why we now spend so much more than other countries on health care.

NDN Green Project Director and Electricity 2.0 author Michael Moynihan will speak on March 24 at noon at the National Press Club at an event entitled "Clean Energy, Smart Grid, and Energy Efficiency: Competitive Electricity Markets and the Path to America’s Clean Energy Future." The event will include leading experts in the clean energy and electricity fields.

The Compete Coalition, the sponsors of the event, issued the following release:

WHAT: Panel discussion exploring the intersection of competitive electricity markets and innovative clean energy, smart grid, energy efficiency, and demand response technologies. 

Unique characteristics of organized electricity markets, such as transparent price signals, well-functioning forward markets, and large geographic scope encourage innovative energy solutions to meet America’s economic and environmental needs. These findings were reflected in the recent “Electricity 2.0” report by NDN and the New Policy Institute, which found that competition in electricity markets is needed to stimulate innovations such as smart grid and clean energy technologies.

WHO: Bill Massey, former Commissioner, Federal Energy Regulatory Commission

Michael Moynihan, Green Project Director, NDN

Dick Munson, Senior Vice President, Recycled Energy Development

Kurt Yeager, Executive Director, Galvin Electricity Initiative

WHERE: Zenger Room, National Press Club, 529 14th Street NW, Washington, D.C.

WHEN: Wednesday, March 24th, 2010, 12:00 p.m. to 1:00 p.m. 

The bill signed today by the President is a very sound, first step towards restoring job creation. The provision to spur employers to bring on workers who have been jobless for some time by exempting those employers from payroll taxes on such new hires, is a particularly valuable policy innovation which NDN has championed for some time. But no one should tell themselves that these measures can undo the damage from the long period of economic errors and neglect before the President took office, and the consequent damage to our economy and tens of millions of families. We should carefully monitor how this measure works; and if it does help spur job creation, Congress should extend and expand the approach. Congress should also take additional steps to support working families, including universal access to instruction in using information technologies through the community college system, and temporary tax benefits for multinational companies that repatriate foreign earnings and use them to create new jobs.

With joblessness still rising despite our historically easy fiscal and monetary policies, the political chatter is full of charges that globalization, especially the role of multinational companies, is costing America millions of jobs. The facts are less clear-cut, and the impact on job creation depends substantially on whether the multinationals are American or based abroad.  

For several years, for instance, Boeing and the European multinational Airbus have been competing for a $35 billion contract to develop and build the next generation of tanker aircraft that refuel other planes in-flight. Boeing is as close to a domestic U.S. company as a large U.S. manufacturer can be these days, with 96 percent of its physical assets located here while maintaining a far-flung global network of suppliers and vendors. The face-off with Airbus pits Boeing against a division of the European Aeronautic Defense and Space Company (EADS), which maintains 96 percent of its physical assets in Germany and France while also depending on global suppliers and vendors. For years, PR flacks for both companies have claimed that each would create many more jobs than the other, if it won the DoD contract.  In practice, Boeing and Airbus will each need roughly the same number of workers, worldwide, to develop and build the new tanker; and in order to be cost-competitive, most of this work would occur at each company’s existing facilities. For an economist or a business person, this suggests that a U.S. based company would create most of those jobs here, where its physical plant is; while a European-based firm would have to produce most of the new jobs in Europe.  

Recently, I tested these assumptions when Boeing asked if my advisory group Sonecon could conduct an impartial analysis of jobs and the tanker contract. I agreed, with certain conditions. First, our study would ignore the PR claims from both sides. Second, we would focus on the new investments in plant, property and equipment provided under the contract, and construct an objective jobs estimate using historical data tracking the relationship for aircraft makers between these new investments and job creation. Finally, we would use only verified, publicly-available data, plus the two firms’ formal proposals to the Pentagon. 

In its formal submission, Airbus proposed to partner with the U.S.-based Northrop Grumman, a common arrangement for foreign multinationals competing for Pentagon contracts. Airbus’s plans also showed, as expected, that it planned to develop and produce most of the new planes at its existing facilities in Europe, with Northrop-Grumman mainly assembling it here. Furthermore, reams of government data established that U.S. subsidiaries of foreign aircraft makers are not only much less invested here than their U.S. counterparts. Those subsidiaries also generate substantially fewer new U.S. jobs for every dollar of new investment here, which means they do the more labor-intensive tasks back home.  

Whichever firm ultimately wins this contract will use a substantial share of the funds to pay outside vendors and suppliers, as suggested earlier, and these payments will also create thousands more jobs, indirectly. But there are no public data on where the myriad parts of each company’s global supply chain are located, so no one can say how many new U.S. jobs will be created indirectly by either rival in this way. We might plausibly assume that the supply chain of a U.S.-based firm is more concentrated here than the supply-chain of a European-based firm; but since we don’t have the data to test that assumption, we set it aside.

These facts and factors produced some definitive results: We found that over the 18-year life of the contract, we should expect Boeing to produce 10 times as many U.S. jobs – roughly 3,500 to 4,000 jobs per-year – as Airbus-Northrop-Grumman. In fact, since the study was completed, Northrop-Grumman pulled out of the competition, leaving Airbus to face Boeing alone.  

These findings throw additional light on other common concerns about multinational companies. Perhaps most important, as Airbus’s case suggests, new investments and job creation by a multinational in its home economy are often accompanied by new investments and jobs by its foreign subsidiaries. That’s just the way that multinationals do business. For example, when Ford or Dell build a new plant abroad, the operations of that facility will generate new business back home, including investment and jobs, because the headquarters will continue to provide its subsidiaries with more advanced services and produce the most advanced parts. That makes the economic impact of multinationals here largely “distributional.” The worldwide networks of multinational companies shift many thousands of basic service and basic production jobs abroad, while creating a smaller number of more highly-paid, more advanced service and production jobs here.

The Pentagon should award its contracts to those firms that can most credibly and efficiently produce the new systems required for American national security. That said, the impact of those contracts on job creation cannot be considered a matter of indifference, especially in a period when American businesses are capable of producing new jobs only at much lower rates than previously.

The New York Times this morning covers China’s suppression of the renminbi to encourage exports and active use of the World Trade Organization’s rules to prevent protectionism by its trading partners. 

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.

In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.

China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

Paul Krugman, in his column today, calls on the Treasury Department to declare China a currency manipulator, I, like Krugman, believe that the common conception of China’s "ownership" of the U.S. is a bit backwards. (Think: When you owe the bank $1 million, the bank owns you, but when you owe the bank $100 billion, you own the bank.) Having said that, Krugman’s solution – "playing policy hardball" by imposing a 25 percent surcharge on imports – seems to approach dangerous levels of protectionism while the global economy remains unstable and could turn out to be ineffective, backfire, or start a trade war. 

Fundamentally, there seems to be a question of domestic Chinese politics at hand – the global economy would be helped by China floating the renminbi sooner rather than later, but that action cannot appear to come as a result of foreign, especially American, pressure. There is, of course, another calculation in play – China’s currency policies hurt America less than they hurt others, namely developing nations. Since public American pressure on this issue is likely to backfire and other countries should care about this a lot, we are left with the less-exciting (and less fun for economic pundits) avenue of behind-the-scenes diplomacy and multilateral action.

Two other stories worth following on global and domestic finance:

• European Monetary Policy remains in flux, as the French are displeased with German labor-cost practices. This follows calls to create a European Monetary Fund, which follow the Greek financial crisis.

• Senate Banking Committee Chair Chris Dodd releases financial reform legislation today. The need and appetite for such reform has only been fueled in recent weeks by an absolutely awful report about what went wrong at Lehman. 

Politicians always on the lookout for ways to stir up voters recently have lit upon the fast-growing size of America’s national debt, whether the context is health reform, unemployment benefits or the war in Afghanistan. Their concerns are usually just easy excuses for opposing basic health coverage for working people, or assistance for out-of-work families, or standing up to Al Qaeda. But if we take them at their word, we’ll find that these concerns are largely misplaced – but not entirely so.  

Moreover, ironically, progressives may have more compelling reasons to control this debt than the current crop of conservative Republicans. Since the time of Ronald Reagan, most Republican conservatives have understood well that the large deficits that pile up the national debt deny Democrats the resources to carry out new initiatives. Bill Clinton and his followers understood this dynamic when they pressed to balance the budget – and, in the process, both create the political space to expand government’s role and deny conservatives the excuse that we can’t afford it. 

Let’s go to the numbers. The total U.S. national debt today is about $12.4 trillion, and CBO expects us to add another $1 trillion a year for another decade. The combination of a high national debt that’s growing very quickly can drive up interest rates. But in strictly economic terms, our debt numbers aren’t as high as they seem. The federal government itself holds $4.5 trillion of the debt, with nearly 60 percent of it sitting in the Social Security Trust Fund – and these securities can’t be sold or traded on financial markets. That brings down the publicly-held, economically-relevant debt to $7.9 trillion. In fact, another $780 billion of that is held by the Federal Reserve, which uses its portfolio of government securities to expand or contact the money supply, and then turns back to the Treasury most of the interest it earns. 

So, the debt most worth worrying about comes to about $7.1 trillion, equivalent to a little less than half of our 2009 GDP of $14.46 trillion. Looking at the national debt as a share of GDP, as economists do, makes sense, because when that share goes up, it usually means that government deficits are growing faster than the economy that finances them. Stated a little differently, when the debt’s share of GDP rises, it usually means that the government is allocating more of the economy. To many economists, this portends slower long-term growth, because government is rarely as efficient as markets in making those allocations.  

That’s just what’s happening now. The share of GDP represented by all of our publically-held debt has risen from 40 percent just a few years ago to about 50 percent today, and it’s headed for 65 percent by 2015. But, the share is also expected to plateau from 2015 to 2020, even without Congress taking new steps to reduce the deficits. The same goes for the total or gross national debt: It comes in at about 80 percent of GDP today and is projected to reach 95 percent of GDP in 2015, where again it will roughly remain from 2015 to 2020. Such a fast-rising national debt, at least for the next five years, does suggest a less efficient economy – but maybe not, because you don’t have to also assume that no other technological or organizational advances emerge over the next few years to make us more efficient. 

Other economists have different worries: They note that historically, when a country’s debt reaches some fairly high level of GDP, investors begin to lose confidence. And when that happens, investors may demand much higher interest rates to keep buying the debt or, in extreme cases, refuse to buy any more of the country’s debt at any price. Across many countries and many years, this no-confidence trigger-level appears to lie at debt equal to 90 to 100 percent of a country’s GDP. But that’s certainly not a hard rule: Japan passed that level without experiencing a debt or currency crisis, and investors almost certainly would grant the United States and the dollar greater slack than Japan and its yen.

Others worry about the interest costs to service the government’s debt. Since, in a roundabout way, the federal government uses bookkeeping notations to “pay” the interest it owes itself, and the Fed gives back most of the interest it earns, what’s at issue here is the interest on the remaining, publically-held debt. In 2009, this debt came to about $7 trillion. Since interest rates have been low, the interest payments came to $187 billion last year, or less than 1.3 percent of GDP. 

That wouldn’t matter much economically, but for one catch: Nearly half of it was paid out to foreign investors, especially foreign governments. If Americans owned all of our national debt, the cost of servicing it would be a wash, since one set of Americans (the taxpayers) would pay another set of Americans (the bondholders). But foreigners now own 47 percent of all publically held U.S. debt – including nearly $900 billion owned by the Chinese Government (that’s more than the Federal reserve holds), $770 billion held by the Japanese Government and that nation’s investors, and another $210 billion by Middle Eastern governments and their reigning families. All of those interest payments are just deadweight losses for the U.S. economy that leave us poorer.

These foreign payments also highlight the domestic political costs of a very large national debt. For instance, the interest paid last year to foreign governments dwarfs the annual cost of the President’s health care reforms. And over the next few years, those costs will increase sharply, because the debt will go up quickly and interest rates almost certainly will be considerably higher. In 2015, for example, the Treasury expects to pay out more than $400 billion in net interest – at least half of it to foreign investors – and those payments should reach more than $650 billion by 2020. These increases in interest payments sent abroad would dwarf the cost of virtually any new social program that progressives might imagine.

Our fast-growing national debt also contains another potential trap. While a prosperous America can handle a national debt of $12 trillion or even $20 trillion a decade from now, another financial or economic meltdown on top of such debt could sink us all. America entered the 2008-2009 financial crisis and recession with an unusually small national debt, as a share of our GDP. That’s why the upcoming decade of trillion-dollar annual deficits (driven mainly by the costs of tens of millions of retiring boomers) will still leave us with a national debt smaller than our GDP. But imagine that a second meltdown requires new bailouts and new stimulus at least as great as the recent ones, but coming this time on top of existing, trillion dollar deficits. Global investors may well balk at those financing demands, producing a downward economic spiral for us all that would be very hard to stop.

This scenario isn’t hard to imagine, given Washington’s inability to agree to the financial market reforms required to avert another crisis. That leaves us with controlling the rising national debt. If the two parties don’t have the stomach to regulate Wall Street, perhaps they eventually will find their way, as Bill Clinton did, to reducing the underlying deficits.