U.S. debt's size, effect still debatable

August 18, 1993|By Los Angeles Times

Remember the national debt, that multi-trillion fiscal embarrassment, which Ross Perot once compared to a "crazy aunt" hidden in the basement?

Despite all the tax increases and spending cuts in the new U.S. budget accord, the overall national debt -- now at least $3.2 trillion -- is expected to balloon by another trillion dollars in the 1990s.

Interest payments on all that red ink will cost more than the defense budget by 1997, according to congressional estimates. Federal borrowing, meanwhile, will remain vast -- gobbling up TC cash that might otherwise go to private investments that spark economic growth and create jobs.

"Less has been accomplished than the legislators are taking credit for," asserts Mickey D. Levy, an economist with NationsBank in New York.

Yet if the national debt has become sort of a national punching bag, the real dangers it poses often are misunderstood, many analysts contend.

By virtually all accounts, it is a financial albatross and threatens increasing turmoil in the coming years. But agreement ends there. How much debt would trigger a panic is unknown. Investors are still happy to lap up Treasury bonds by the billions, as they did in an auction last week.

Even the debt's exact size is a matter of debate, and its role in making America dependent on foreign investors often is exaggerated, statistics suggest.

Take the much-ballyhooed threat from overseas. There have been ominous warnings that foreign investors could get fed up with America's fiscal imbalances and dump their U.S. Treasury securities, sparking a financial debacle.

In fact, 83 percent of the debt is held by Americans -- banks, insurance companies, private individuals, local governments and others -- according to a May study by the Congressional Budget Office. For all the anxiety about foreign influence, the overseas share has not increased since 1980.

"Thus far," report the CBO researchers, "these fears have proved ill-founded."

Holders of U.S. Treasury securities -- sold as bonds, notes and bills -- are helping finance the national debt whether they realize it or not. Moreover, they make money on the interest, which ripples back into the economy.

There also is confusion about the debt's magnitude.

It has been popularly pegged in the $4 trillion range. But many economists say that figure is misleading, because it lumps together $3 trillion or more in public debt -- owed to private lenders and sold in credit markets -- with another $1 trillion in trust funds that the government owes for pensions, public works and other programs.

"There's nothing you can do with the $3 trillion but pay it or default," says James F. Smith, an economist at the University of North Carolina, Chapel Hill.

The other obligations may have tremendous significance, but in political terms, not economic. "They're moral obligations," Mr. Smith says. "They're not legal obligations."

Certainly, the millstone of debt could grow weighty enough to disrupt financial markets, propelling interest rates skyward and triggering a global crisis.

"But we can't say what the trigger point would be," says Ross DeVol, an economist with the WEFA Group in Bala Cynwyd, Pa.

Indeed, for all the agonizing and political finger-pointing about the burden of red ink, it has become a humdrum fact of life in global finance.

Investors remain content to buy Treasury securities, with little worry that the money is safe. Just last week, the Treasury Department auctioned $38.5 billion in securities to cover the debt, an event so routine it drew only modest public attention.

In the aftermath of the recent deficit-cutting debate, however, economists are examining a key question about the national debt: Will it continue to outpace the growth of the economy, as it has since the 1970s?

A reversal in the trend would ease pressure on the economy, freeing cash for private investment, boosting confidence and providing the government with more leeway in how to parcel out its money.

A new WEFA Group analysis found that the total debt, now 52 percent as large as the U.S. economy as measured by Gross Domestic Product, would gradually shrink to 47.6 percent by 1998, largely as a result of the new budget plan. To some observers, this is reason for qualified, good cheer: Under the old law, WEFA forecast the debt approaching 55 percent of the economy by 1998.

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