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Economy Writer Warns U.S. Could Go Broke


We've been talking about debt this week. 'Tis the season to look at that balance sheet, not just in your house but in our house. Yesterday, economist Dean Baker concluded that the national debt, while a very large amount of money indeed, is not unprecedented when you compare that debt to the size of the economy as a whole. Not ideal, he said, but as long as investors are happy to buy 10-year government notes at 3.5 percent, not a major problem.

Today, we'll give you a different view. Columnist Robert Samuelson writes about the economy for Newsweek and the Washington Post. And he joins us by phone from his office. Nice to have you on the program with us.

Mr. ROBERT SAMUELSON (Contributor, Newsweek): Nice to be with you.

CONAN: And you worry about the possibility - maybe tomorrow, maybe 10 years from now, when investors suddenly decide that U.S. government notes are not such a great idea.

Mr. SAMUELSON: Well, that's the problem. You don't know when it will happen or whether it will happen. But the amounts of debt that we're accumulating are, in some ways, unprecedented. It is true that if you go back to the end of World War II that the debt in relationship to our economy was larger. But governments always or almost always take on huge amounts of debt during wartime. And so that's really an exceptional circumstance.

The kind of debts that are now being projected by the Obama administration - these are their own projections - if realized would be the highest since 1950 in relationship to the economy in a decade. And they would still be going up. And many observers consider their estimates to be optimistic. So we do have a problem. And, you know, I think if we simply ignore the problem, we run the risk that it will turn into a dangerous situation that will force unpleasant reactions on the American people and on government.

CONAN: Well, we want to hear from listeners. If you have questions or concerns about the national debt, call 800-989-8255. Email us: talk@npr.org. You can also join the conversation at our Web site. That's at npr.org - click on TALK OF THE NATION.

And in a column you wrote, you speculated, Robert Samuelson, that in fact if the psychology does not go the way we'd like it to go, the U.S. might go broke.

Mr. SAMUELSON: Well, go broke in the sense that what I was speculating on in that column is that some major advanced wealthy society might default on its debt. And that would include the United States, but would not be just the United States. It could be Great Britain. It could be Japan. It could be any number of countries.

And what I was saying in that column was that the amounts of debt that most major wealthy society are taking on are huge, and at some point investors many no longer want to lend. Or if they do lend, they will lend at much higher interest rates, and that will force the governments then either to go - have major cutbacks in spending or huge tax increases, both of which threaten to lower living standards and retard economic growth.

So that's the danger. The danger is that you get so much debt that investors don't want to buy it, don't want to lend to the government. And at that point, the government has to take steps to sort of change that situation, and the steps are very socially and economically painful.

CONAN: As you just referred to and as we heard yesterday, Japan's debt is much greater in proportion to its GDP than is that of the United States. Does anybody seriously worry that Japan is gonna go broke?

Mr. SAMUELSON: People worry that at some point investors may not lend the way they are lending today. Let me give you an analogy which I think may make it easier for your listeners to understand what the danger is. I want to go back to the 1960s, when most economists said the United States can grow faster. And the way it can grow faster is by manipulating budget deficits and interest rates. And if we do that in a wise and sensible way, we will eliminate business cycles to maximize economic growth and keep the economy at full employment.

It's true, these economists said, that we will have a little bit more inflation. But the little bit more inflation won't be very damaging. People will adjust to it and won't make much difference. Well, what in fact happened was we didn't just have a little bit more inflation. First, we had a little bit more inflation, then we had a little bit more inflation. And after that, we had a lot more inflation. And by the end of 1970s, we had double-digit inflation. And that was very destabilizing for the economy. We had four recessions between the end of the 1960s and the early 1980s. Average unemployment went up. And that - all of that contradicted the conventional wisdom that most economists were giving the government in the 1960s.

The debt problem is similar. We could go on for a number of years running up huge debts. But if the psychology of the financial markets at some point changes, then you will get a very harsh reaction and people will look back and say: What were we thinking? What were we thinking at all? And so my view is not that we have to get rid of the debt tomorrow or the deficits tomorrow, but that we need to be prudent and commonsensical about this, and that we need to begin to take the steps to reign in these huge deficits and prevent the debt from growing to levels that may backfire on us.

CONAN: Let's get some callers in on the conversation. Our guest, again, is columnist Robert Samuelson. 800-989-8255. Email is talk@npr.org.

CHUCK (Caller): Hi, this is Chuck in San Francisco, desirous of asking a question of your guest Mr. Samuelson.

CONAN: Go ahead, Chuck. You're on the air.

CHUCK: Thank you very much. Let me turn my radio down. I'm concerned about the punitive $40 to $60 trillion unfunded liability for Social Security, Medicare and Medicaid. But the range is so wide that I can't quite figure out what the potential damage could be to the economy if either one of those numbers or anytime - or in any amount within that range is true.

CONAN: A great deal of U.S. government spending focused on Medicare and Medicaid and Social Security. Robert Samuelson?

Mr. SAMUELSON: Well, I think it is - it's confusing to focus on these unfunded liabilities numbers, which are so huge, that most normal people can't understand them. I think it's much more useful and clear to just focus on the amount of money that we're spending on these programs every year, which is now more than two-fifths of the federal budget. If you take Social Security, Medicare and Medicaid, put them together, we're spending more than 40 percent of the federal budget on those programs.

If you look at just health spending alone, it's around the quarter of all spending. We have not reined in these costs, and, in fact, the Obama administration proposals will raise health spending in the future and divert more tax revenues into health spending. And our unwillingness and inability to control these programs is the essence of the budget problem. Because we are now going into a period - I'm 64. I'm at the edge of the baby boom. My generation is about to retire. And we are going to be asking for more and more benefits. And unless those benefits are somehow curbed, either spending of - for other programs will have to be cut back or taxes will go way up, or deficits will soar to what may be unsustainable levels. So...

CONAN: Just a question...

Mr. SAMUELSON: ...we're really in a cul-de-sac.

CONAN: Just a question there: Would health care costs rise even more without the Obama administration's proposals?

Mr. SAMUELSON: No. Not in my view.

CONAN: Not in your view. There are those who disagree with you.

Mr. SAMUELSON: If you ensure 30 million more people and do it heavily on federal tab, it's implausible to think that health spending is going to go down.

CONAN: That...

Mr. SAMUELSON: Now, it can conceivably might slow down - the rate of growth might slow down if they really have effective measures in these bills to control spending, but in my view, they don't.

CONAN: The Congressional Budget Office disagrees with you.

Mr. SAMUELSON: No. They don't disagree. They do not - the savings that are written into the budget are purely mechanical. That is to say, the bills say Medicare spending will go down, that the rate of increase will go down.

If it doesn't go down, it just - the rate of increase. But it is simply an assertion. And there are many people who believe that when it comes time for the program cutbacks to occur, Congress will actually relent, so that these financing mechanisms are, to a large extent, or they may be, to a large extent, fictitious.

CONAN: All right. Let's get another caller in: Wayne. Wayne's calling us from Marshalltown in Iowa.

WAYNE (Caller): Hi. Thanks for taking my call.

CONAN: Sure.

WAYNE: I have a question, perhaps a concern. In the lead up to the conversation, your guest made the comment that - talking about post-war deficits and, you know, how much debt that we had post-World War II. And I just want to, perhaps make the comment: We are currently in a war that's lasted longer than World War I and World War II put together. And how does the impact of World War II's economy on debt compared to perhaps our wartime economy and debt?

Mr. SAMUELSON: Well, you have to - it's true that the war against terror now has extended longer than World War II. However, the magnitudes of these commitments are completely different. In World War II, the government spent almost half of the production of the economy on wartime spending, defense spending. At the end of the war, there were 12 million Americans in uniform. We lost over 400,000 people, military dead during the Second World War.

But today's defense spending including Iraq and Afghanistan and other defense spending is four percent of our economy, not 45 to 50 percent as it was in World War II. So the economic commitment to these wars are not of the same magnitude. They're not even in the same ballpark. And so the debt that we had at the end of World War II - which was roughly 109 or 110 percent of the size of the economy, but which quickly came down to about 80 percent of the economy by 1950 and then continued to drift down for many years, that was a base - that was an all-out mobilization of our society. We don't have anything like that today, so that the two situations are really not economically comparable.

CONAN: Wayne, thanks very much for the call. We're talking with columnist Robert Samuelson about the national debt.

You're listening to TALK OF THE NATION from NPR News.

Let's go next to Chris, Chris with us from Brookline in New Hampshire.

CHRIS (CALLER): Hi. How are you doing, folks? Thank you for taking my call.

CONAN: Sure.

CHRIS: I have a question kind of similar to the previous caller in regards to the national debt and percentage thereof post-World War II to - compared to today. Break the - back - post-World War II and even during World War II, a good percentage - I believe almost 60 percent of that debt was held by Americans. Can you tell me what percentage is held by foreigners? I'm sure it's probably - today, is held - at least 90 percent of that's held by foreign governments or central banks.

CONAN: Or how significant is it that such a huge percentage is held by foreign banks and foreigners, Robert Samuelson?

Mr. SAMUELSON: Well, I don't know what percentage at the end of World War II was held by foreigners. My suspicion is that it was very small, but I don't know that. And I - to be honest, I have not looked recently at the percentage of the current debt that is held by foreigners. The last time I looked, it was - is, I think, near 50 percent.

But I - and I would say that the fact that more of the debt today is held by foreigners than it used to be creates additional problems and not fewer problems because the dollar is the currency of the world economy. And if foreigners lose faith in the willingness of the United States to repay its debt, the dollar will cease to function as a global form of money used for trade and international investment. And that would have, I think, very dramatic effects on the functioning of the world economy.

So the fact that foreign governments - or not just foreign governments, but foreign private investors and corporations - hold large amounts of U.S. Treasury securities, it seems to me to some extent makes the world and makes us more vulnerable than the we were before.

CONAN: Chris, thank you. Let's go next to Zede(ph), Zede with us from Berkeley.

ZEDE (CALLER): Yeah. Good morning. Nobody is really addressing the underlying cause, why we're going through this nonsense. It started with Mr. Reagan. At that time, I owned a very big business in Berkeley, California. When he closed all of the consumer electronic corporations and sent them over to Japan, automobile companies were shattered themselves, all of other businesses - all of other manufacturing sector was destroyed by Reagan and the new conservative and people after him. We have to - the only way we can remedy this is the situation right now. It is a joke to buy anything made in China, whether electronics or shoes or clothes or food or anything.

There's three things I recommend that have to be done right away. Whether it is practical or not, we'll have to figure it out. Number one, we have to - moratorium in all imports for so many years. We have to stop outsourcing so-called jobs overseas and bringing all of the jobs back to America. I don't need to talk to somebody in India or Philippines to do my credit card to bank or to insurance, whatever.

We also have to stop the H1 and H2 visa. Even though I am foreign born, but I love this country and I want this country to go well. You don't have to give up to $200,000 a job - American man to bring somebody from East India to work for 20,000. We have to do a lot of that, and that, surely, will solve the problem. Short of that, we're just wasting time talking about it and nothing will ever happen.

CONAN: Well, let me summarize that. Robert Samuelson, is economic protection is in the answer?

Mr. SAMUELSON: Well, I don't think it is. I think if we stop duel imports - in the first place, there'd be a lot of thing that we'd be short of. Inflation would go away up. That would harm the economy. It would be inevitable, I think, that other countries would retaliate against us and stop our exports, and that would hurt the economy, as well. Moreover, the fabric of international confidence would be shred completely. So I think the suggestions that the caller makes would be a recipe of economic calamity.

Having said that, I do agree that it's desirable for us to resuscitate our manufacturing base, to shrink our trade deficits, and to focus more on our domestic economy. I think that the slow depreciation of the dollar which makes U.S. goods cheaper on world markets and makes foreign goods more expensive in the United States may be beginning to accomplish that. But there are additional steps we need to take as well to improve our international competitiveness. And I would say liberalizing immigration for high-skilled foreign workers would help the U.S. economy (unintelligible) in here.

CONAN: That would be those H1 visas. Yeah.

Zede, thank you very much for the call. We appreciate it.

And we'd like to thank Robert Samuelson for his time today. Thanks very much.

Mr. SAMUELSON: Thank you, Neal.

CONAN: Robert Samuelson, a columnist for Newsweek and the Washington Post, with us today by phone from his office. For a link to some of his columns, you can go to our Web site where you can also hear our conversation with Dean Baker yesterday, the economist Dean Baker had a different view of the national debt problem and how much of a problem it is.

This is TALK OF THE NATION from NPR News. I'm Neal Conan in Washington. Transcript provided by NPR, Copyright NPR.

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