National debt: How high is too high?
Q:听What is national debt, and why is it important?听
National debt is a measure of how much money a government has borrowed, and thus how much it owes. When compared with other factors, such a figure can provide keen insight into a country鈥檚 fiscal health.
Perhaps the most important number to consider alongside national debt is a country鈥檚 gross domestic product. The critical question, says Jeffrey Frankel, an economics professor at Harvard Kennedy School in Cambridge, Mass., is whether debt is growing faster or slower than GDP. The situation is considered stable, Dr. Frankel adds, 鈥渋f national debt is decreasing as a share of GDP.鈥�
Q:听Is there an ideal level of national debt?
In short, no. The level of debt a country can safely handle depends on a multitude of factors. Generally, rising debt can cause economic strain: A bigger portion of government expenditures has to be set aside for interest payments, for example.
Yet at times, more borrowing may make sense. If the economy is stagnating, the government may want to increase spending as a stimulus, perhaps by investing in big infrastructure projects.
The optimal level of debt for any given country, explains Nicolas V茅ron of the Peterson Institute for International Economics in Washington, 鈥渄epends upon its creditworthiness 鈥� its ability to pay back.鈥�
Q:听Why are the levels of national debt so different between developed and developing countries?听
As the charts illustrate, developed countries hold vastly greater levels of national debt than developing countries. The reason, Mr. V茅ron says, is 鈥渕arket discipline鈥�: Investors are less inclined to lend to emerging markets, where they perceive greater risk.
鈥淭he more creditworthy you are, the more you can borrow,鈥� V茅ron adds. 鈥淚t鈥檚 true of individuals; it鈥檚 true of countries.鈥澨�
Q:听Is the national debt in the United States likely to change under President Trump?听
Since the 1980s, US national debt has been surging, with it now close to $20 trillion. As a percentage of GDP, it has also been rising, though there have been spurts during which the budget deficit was reduced, most notably during President Bill Clinton鈥檚 second term, when there was actually a surplus.
Although it is impossible to predict with certainty what will happen now, most analysts expect 鈥� and Mr. Trump鈥檚 own words suggest 鈥� big tax cuts and big spending increases, which would mean a rising national debt. If a splurge on infrastructure can boost growth, GDP might keep pace with national debt, but some analysts, including Frankel of Harvard, are doubtful that would occur.
Q:听What role has national debt played in Europe鈥檚 recent financial struggles?听
Some analysts wonder whether too much austerity was imposed to deal with the crisis that seized Europe starting in 2009 鈥� or at least whether it was imposed in the wrong way, at the wrong time.
Although Greece has been considered an advanced economy, V茅ron says, it had 鈥渓ots of features of emerging markets.鈥� Thus its debt levels before the crisis were far higher than they should have been.
Frankel agrees with V茅ron, saying that Greece needed austerity before 2008 but didn鈥檛 have it; then, when the economy was already on its knees, austerity was imposed. He refers to renowned British economist John Maynard Keynes: It鈥檚 in the boom times that governments should cut back.
