# Rogoff: 'Adding a Trillion Dollars in Debt Is Quite Manageable'

by: The Good News Economist

Said another way: Another \$1,000,000,000,000.00 in public US debt is manageable. Can you believe that? I do now, because Professor Kenneth Rogoff said so and so do the numbers.

I stumbled upon this fascinating interview with Rogoff, economics professor at Harvard (his Alma Maters were MIT and Yale). The entire interview is here on the Minnesota Fed's website.

The attention grabber was Ken's statement, "Fortunately, adding a trillion dollars in debt is quite manageable for the United States." And on what basis? "...the United States grew decently until recently, so that our debt/GDP burden is still modest by European or Japanese standards."

Really? Let's have a look at that. The CIA fact book has the total listing here. And translated onto a map, the ratios are distributed like this (thanks to wikipedia):

Looking closely at the CIA fact book, indeed Japan's debt/GDP burden is 170%. Italy is at 104%. Germany, Canada, France? All around 64%. And the US? A measly 61%.

So now that we know we are more qualified to take on more debt than Japan, or Canada, or France, historically how are we doing? How has our GDP compared to our debt load over time?

As you can see even though our debt has increased over time, our ability to pay the debt (our GDP) has kept pace (or outpaced) our debt load. And the ratio of debt to income is nowhere close to where it was in the mid-40s.

So what does the chart tell us? The proper way to measure the impact of national borrowing is by calculating the total debt as a percentage of income... just like qualifying for a home loan. This is exactly the same exercise that banks use to determine if you are fit to buy that huge house. Just because your debt may increase, your absolute debt number says nothing about whether the debt is too high for you. Only by also looking at your income can the bank determine whether or not you can afford your mortgage combined with your other obligations. And what is the worst that can happen once you move into that house and start working that new mortgage book? Your bonuses get cut. Or you lose your job. So then what? Do you default? Maybe.

Maybe not.

You are smart, productive and innovative. Perhaps a new and better job comes along. Or you get funding for that venture that you always wanted to start... and before you know it you are making more money, are more productive, and ready for a bigger house and bigger mortgage. It's the American dream, a message of increased productivity and innovation in the face of adversity. A message of hope and good news.

So the new Congress and President-elect talk of a \$700-\$800 billion stimulus plan. Bring it on.

Professor Rogoff continues, "bailing out the financial system is [was] not a fun way to spend money... we'd rather spend it on health, education, infrastructure or the environment."

Let's go for it.