The official debate over the economy shifted decisively last summer away from proposals for job creation to obsessing over the size of the federal government’s deficit (how much we are borrowing each year) and debt (how much we owe overall). The federal deficit has indeed been historically large since the recession began, running at about 10 percent of GDP for the past three years, as opposed to the historic average of 2 percent of GDP. But that is only because the jobs crisis itself is of historic magnitude. Solving the unemployment crisis would accomplish far more than any other measure toward bringing the federal deficit down. This is simply because when more people have jobs, they also pay more taxes and rely less on government support, such as unemployment insurance and Medicaid.
There is another point to emphasize here. Despite the historically large fiscal deficits, the federal government is now paying interest on the total outstanding debt at a rate that is historically low, not high. This is for the simple reason that the interest rates on U.S. Treasury bonds are themselves at historic lows, at around 2 percent. As such, while it is true that the government will need to reduce its borrowing once the recession is behind us, there is no immediate crisis whatsoever in terms of the government paying off the debt obligations it faces now or over the next few years.