The Debt Debate

Never have so many disagreed so much on such an important issue as whether public and private debt burdens represent a serious threat to America's future economic vitality. On its most basic level, the answer depends on one's view of whether or not robust economic growth is around the corner.

Optimists say recent improving debt trends will continue and that overall debt loads aren't burdensome when viewed on a relative basis. Skeptics, naturally, worry about absolute debt levels, which are extraordinarily high by some measures, and fret that crippling amounts of red ink will flow if the economic recovery stalls.

And despite some positive trends in public and corporate debt, there is a sharp difference of opinion over whether there will be enough improvement to ensure the economy can stay healthy.

Nowhere is this divisive argument more evident than in the debate over tax cuts -- held, of course, in that most divisive of arenas: politics. Supporters of President Bush's tax-cut package, such as the Cato Institute, note the original proposal for tax cuts of $726 billion over 10 years would represent about 0.5% of GDP, based on the Congressional Budget Office's estimates that gross domestic product will be approximately $140 trillion over the next 10 years. (By comparison, President Ronald Reagan's 1981 tax cut topped out at 3.3% of GDP.) The president's scaled-down request of $550 billion would be less than 0.4% of those GDP estimates.

However, the CBO also forecasts the federal government will produce deficits averaging about $310 billion in fiscal years 2003 and 2004, even when using so-called dynamic scoring that incorporates positive economic growth from tax cuts. Economists at Goldman Sachs, among others, believe those deficit estimates are overly conservative and fail to fully incorporate the impact of future tax cuts, military spending in Iraq, and presumed ongoing weakness in equity markets and economic growth.

Last month, Goldman estimated the federal budget deficit would be "at least" $375 billion in fiscal 2003 and $425 billion in 2004, and forecast deficits exceeding $4 trillion for the 10 years ended 2013 vs. the CBO's estimate of $2.7 trillion.

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