Nov 07, 2009 (The Pittsburgh Tribune-Review - McClatchy-Tribune Information Services via COMTEX News Network) --

John B. Taylor served as an economic adviser to Presidents Gerald Ford, George H.W. Bush, George W. Bush, presidential candidate Bob Dole and the Congressional Budget Office. From 2001 to 2005, he was undersecretary of the Treasury for International Affairs, where he was responsible for U.S. policies in international finance.

He is the Mary and Robert Raymond professor of economics at Stanford University and the Bowen H. and Janice Arthur McCoy senior fellow at the Hoover Institution.

We talked by phone Wednesday about the impact of the growing national debt.

Q: Sixty percent of people sampled in a recent Peter G. Peterson Foundation survey said they considered the $11.9 trillion national debt to be a big threat to the country. Why should we be worried?

A: Because it's growing at a more rapid rate than it has in virtually any other time in our history with the possible exception of World War II, and it's expected to grow even further in the future.

That puts a burden on future generations to pay interest on that debt. It makes it likely that inflation will pick up. It makes it likely that interest rates will start to rise. So there's a number of reasons to be concerned, and I think people are correct to be identifying that as a serious problem we're facing right now.

Q: The director of the Congressional Budget Office has told Congress that, under current law, the federal budget is on an unsustainable path because federal debt will continue to grow much faster than the economy over the long run. CBO is predicting it's likely to increase from 41 percent of GDP in 2008 to 82 percent of GDP in 10 years. What kind of an impact would that have?

A: Just in the next 10 years, if it raises our debt so much, from roughly around 40 to roughly around 80, that's doubling it. ... GDP total production and income measures how much we can service the debt. So what that means is that something has to give. You have to find a way to control spending. Tax increases will not do it -- it couldn't possibly generate that much of a gap with tax increases -- and then the other possibility is inflation rising, which is a concern.

Q: You've said inflation could help bring the debt-to-GDP ratio down to the 2008 levels but that would mean a doubling of prices. Even in the most robust economy, it would be hard to imagine a 100 percent inflation rate.

A: I think that would be a mistake, in my view. Having inflation pick up is one of the possible consequences, one of the possible harmful consequences, of reducing the debt burden. But if you took and doubled the prices, that would make the debt less onerous but it would also create enormous harm to our country. We'd have ... more crises and it would be like the late '60s and '70s where we had many recessions and big recessions.

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