As several recent surveys make clear, concern about deficits and debt is rising sharply. An NBC/Wall Street Journal survey conducted in early May showed that the share of individuals rating “the deficit and government spending” as the top priority for the federal government to address has jumped since January from 13 to 20 percent—second only to job creation and economic growth. According to Gallup, “federal government debt” now ties with terrorism for the top spot in perceived threats to our future well-being. It is entirely possible that we are reaching an inflection point in public attitudes that will force the political system to change course.
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In plain English: the higher spending and public debt go, the stronger the economic case for fiscal restraint. At some point, serious deficit reduction ceases to be a green eye-shade exercise and becomes essential for sustainable economic growth. But when? After summarizing the grim prognosis for U.S. deficits and debt during this decade and beyond, Auerbach and Gale formulate the choice as follows:
“[P]olicy makers will need to decide when to cut off stimulus and start imposing fiscal discipline. Cutting off stimulus too soon could plunge the economy into a new downturn, as happened to the United States in 1937 and Japan in 1997. Letting stimulus run for too long could ignite investors’ fears and create a ‘hard landing’ scenario.”
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