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Demystifying the national debt

Kai Ryssdal Apr 10, 2012

Kai Ryssdal: A quick check of the official Treasury Department Debt Clock today brings us this sobering number: $15.6 trillion. It’s actually $15.6 trillion and 83 cents, but we’ll just round down.

What to do about that debt is helping to shape the election this fall. Just today the president was talking about it, as we said earlier.

Economist Simon Johnson’s been thinking about debt a lot and what we ought to do about it. He’s got a new book out with James Kwak. It’s called “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.” Thanks for being here.

Simon Johnson: Thanks for having me.

Ryssdal: How did we get here? What happened that this idea of our debt became — I mean, it’s all-consuming now.

Johnson: It certainly has become a big preoccupation. It’s a very interesting story, and the history is that we went through repeated crises for the republic, and each time, ran up the debt but then managed to bring it down. The problem we encountered in the 1970s and 1980s was the conviction that you could cut taxes and yet get more revenue. That’s an illusion but it’s an illusion that’s been with us for a long time. We also of course had a couple of big foreign wars recently, and we had this huge financial crisis, and that destroyed a lot of tax revenue — that’s what happens in a recession. So it’s this combination that’s brought us to a very difficult point. And now we’re going to have a discussion, a debate I think, during this presidential election year: What should the government be doing and how do we pay for it?

Ryssdal: This is going to sound like one of those snooty, know-it-all public radio questions, but I kind of have to ask it anyway: Do we all understand what you — that is, economists and policymakers — are talking about when the subject is the national debt? I mean, do we get it, do you think?

Johnson: I think people, many people, don’t fully grasp what the national debt is about. And I think it’s a bad mistake to trust not just the politicians but also the economists to explain it all to you, frankly. Sure, some of these issues are maybe a little complex, but absolutely comprehensible for everyone. It’s also not a set of problems that any of us individually can afford to ignore.

Ryssdal: To that point, and the idea that financial crises — they happen slowly, but once they happen, they happen all at once — how much time do we have, do you think, before we become another Greece?

Johnson: I don’t think we’ll ever be Greece. That’s one thing. But we will come under pressure. When exactly? I can’t tell you. But I can tell you this: If we don’t prepare, if we don’t start down the right road now, we are taking risks. We are taking unnecessary risks and we are pushing ourselves towards very difficult outcomes. We can get ahead of it but we have to push — we have to push ourselves to understand, we have to push the politicians to get to grips with this.

Ryssdal: Let me turn it this way: If we’re in such bad shape, as you and your co-author James Kwak, argue that we are with our debt, why is that the Treasury Department can go to the bond market and borrow money almost for nothing, in real terms? It’s basically free for them.

Johnson: This is very much about the nature of the world today. There’s a lot of people around the world who want to say they don’t see a lot of strong, alternative, safe places to put their money; they put it into U.S. Treasury debt. And that’s bit of a problem because the politicians are smart, rational, calculating people — they say well, why should we even discuss measures that are potentially unpopular when we can continue to borrow at 2 percent? The problem is, you can’t borrow at 2 percent indefinitely; sooner or later, the markets will turn against you. And of course, experience — not just from our history but also from other countries around the world, including Europe recently — is that when the markets turn against you, they turn very quickly. And you’d better be prepared for that day, otherwise you will be forced into precipitant, hasty and really disruptive austerity — either cutting spending or raising taxes or both.

Ryssdal: Simon Johnson’s at the Sloan School of Management at MIT. His new book with James Kwak is called “White House Burning.” It’s about the national debt. Simon, thanks a lot.

Johnson: Thank you.

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