Figure 14.2 Publicly Held Debt as a Percent of GDP Source: Economic Report of the President, 1999. www.access.gpo.gov/eop/
steadily, an unusual phenomenon except during wartime. Unfortunately, there is no economic prescription for determining an "optimal" debt/GDP ratio, so we cannot say that a structural deficit is necessarily a bad thing in the short run. By world standards the U.S. debt/GDP ratio is moderate, comparable to that of France, Germany, and Great Britain, and far less than that of Canada and Japan where it is about 80 percent and Belgium and Italy where it is over 100 percent. A common argument in this context is that a rise in the ratio implies that a burden is being placed on future generations.
14.3 Burdening Future Generations
The question of whether a burden is being passed on to future generations is best addressed by examining the capital stock that is being passed on at the same time. Let us examine this issue first by assuming only domestic borrowing and second by assuming borrowing from foreigners.
Domestic Borrowing
If the borrowing is domestic, then we owe the debt to ourselves, and it seems that overall there is no intergenerational burden. This reasoning is misleading, however. Domestic borrowing to finance a deficit crowds out some investment spending. If the deficit spending is on capital assets such as roads and airports, it is possible that the capital stock passed on to the future generation is of more value than the investment spending that is crowded out.
