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There is no one “stable” debt ratio

Suppose, just for entertainment purposes, that we wanted to have a sane, rational, and even informative discussion about what to do about our public deficits and debt (the latter being the cumulative sum of the former)—one that asks the questions posed in the title but doesn’t automatically default to the “hair-on-fire, we’re Greece!, hard choices, serious sacrifices” that we too often get from the deficit reduction industry.

First off, “stabilizing the debt” means to stop the debt ratio—debt/GDP—from rising (where “debt” means debt held by the public—that’s what matters for all that follows).  For our debt to grow more slowly than our GDP, our deficits don’t have to be zero, but they do have to be below 3% of GDP.*  Why is that a good thing?

Well, in fact, it’s not always a good thing.  In times of crisis—recessions, depressions, war—the ratio goes up for good reasons.   Our borrowing temporarily outpaces our growth in order to offset some disaster.

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