U.S. National Debt Is Huge, but It's Not a Catastrophe

With Congress soon to face a decision about whether or not to raise the federal debt ceiling, the question of how we should deal with the $14.08 trillion U.S. national debt has come into focus again.

Former Minnesota Gov. Tim Pawlenty, who will probably seek the Republican president nomination in 2012, has gone on record in an op-ed column in The Washington Post opposing the debt-ceiling increase.

Pawlenty won't be the only one taking that position as the U.S. approaches its $14.3 trillion statutory debt ceiling this spring. And the key point in the argument made by almost all of the "no debt-ceiling increase" proponents is correct: The national debt is large and must be reduced. Indeed, there's a general consensus on that point in Congress, too.

However, what Pawlenty fails to point out -- and this is critical in the understanding of the debt's impact on the U.S. economy and society -- is that while the national debt is large, that doesn't mean it isn't serviceable. What's more, a large national debt doesn't necessarily spell economic doom.

What's Wrong with a High Debt-to-GDP Ratio?

One way economists measure the seriousness of a country's debt problems is as a percentage of GDP. Based on the Central Intelligence Agency estimate of 2010 U.S. GDP -- $14.7 trillion -- the national debt in March will be about 97% of GDP. In comparison, the CIA's 2010 GDP estimates for other nations indicate that Japan's debt is about 196% of GDP, France's 83.5%, Germany's 74.8%, Brazil's 60.8% and India's 55.9%.

But again, the high debt levels of those developed and emerging-market giants doesn't mean their economies are on the road to ruin. Most investors are aware that Brazil and India have robust economies with promising prospects for even more wealth creation, so let's concentrate on the others.

Japan. Does anyone really doubt that Japan will be a source of innovation, strong exports sales and wealth creation in the decade ahead? Granted, Japan faces an even more serious demographic problem than the U.S. -- the average age of it's population is rising rapidly, and its birth rate is too low. Plus, S&P downgraded Japan's sovereign debt rating on Jan. 27 to AA - from AA. Still, there's little to suggest that its national debt impairs its ability to remain a major industrial power. Any doubts about this could be dispelled by a quick drive past your local auto dealerships. It's clear Japan is still making many of the world's preferred cars and SUVs.

France. France implemented public pension reforms in 2010, and it will likely have to go further in the years ahead, as well as paring down other government spending. But neither of these concerns, nor its high debt, have resulted in a mass exodus of investors. Most French citizens remain committed to capitalism tempered by a comprehensive social welfare state that strives for equality and that ensures that no person falls below a dignified living standard. France's high national debt also apparently hasn't diminished its lure and appeal: The country attracted more than 75 million foreign tourists in 2010, making it the most visited nation in the world.

Germany. In addition to continued costs associated with the integration of the former East Germany, Germany also faces a significant demographic challenge, which will probably trigger public pension reform. Even so, there's little to suggest that Germany's large national debt will prevent it from maintaining its status as an ingenious and savvy exporter, propelled by a diverse economy with a highly skilled workforce. And no, investors are not pulling out of Germany, home to the world's fifth- largest economy and continental Europe's financial center.

Economic Giants Can Handle Big Debts

Large national debts haven't prevented Japan, France or Germany from maintaining their status as economic powerhouses. The U.S. debt won't stop this nation either.

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But if a large national debt doesn't prevent economic greatness, what's driving Pawlenty and others to paint a picture of economic ruin? Perhaps it's just a personal value or a belief that a nation should pay for all of its purchases and expenditures with cash? Or a belief that the federal government should not be involved in providing certain services to its citizens?

Or perhaps Pawlenty doesn't want the economy of the U.S. to become too much like the economy of France (with its capitalism tempered by a commitment to egalitarianism and defense of human dignity), or Germany (with its ingenious exporters, global competition-ready workforce and supportive social services), or Japan (with its innovation and world-class manufacturing).

I'll leave it to others to speculate on the real goals of lower-national-debt advocates, but one thing is certain: They can say the U.S. national debt is large, but they can't say a large debt prevents a nation from being an economic powerhouse.