US, examining a bailout, has boosted debt before

The proposed $700 billion bailout of the financial system is staggering, for sure, but there have been times when American debt relative to the size of the whole economy has been just as big — sometimes much bigger.

The Bush administration plan to shore up banks rattled by the meltdown of the housing market and clenched-up credit markets would raise the federal debt to an all-time high of more than $11 trillion.

Details are still being worked out in Congress, but the proposal would lift the legal limit for government borrowing to $11.3 trillion, $700 billion higher than what it is now and twice what it was a decade ago.

Economists warn ballooning the federal debt could weaken the U.S. dollar, raise interest rates, weaken the already faltering economy and ultimately lead to higher taxes.

Still, compared with the existing $9.5 trillion debt, "another $700 billion is not enormous," said William Cline, a senior fellow at the Peterson Institute for International Economics, writing on the institute's Web site.

The national debt is the accumulated total of each year's deficit — the difference between what the government gets in taxes and what it spends. The debt has grown this decade because of borrowing to pay for the wars in Iraq and Afghanistan.

Many economists consider $5.5 trillion a more accurate current figure for the debt, since $9.5 trillion includes debt the government owes to itself in the Social Security and Medicare trust funds.

At the moment, that figure is roughly equal to 39 percent of the $14.3 trillion U.S. economy. That's much lower than after World War II, when the debt reached 109 percent of total economic output in 1946.

Steven Hess, lead U.S. analyst for credit rating agency Moody's Investors Services, said he expects the debt will climb to the mid-40s as a percentage of the economy because of the bailout and the higher cost of entitlement programs such as Social Security.

That's similar to the levels of the late 1980s and early 1990s. The ratio reached almost 50 percent in 1993, up from about 25 percent in 1981.

So, what would a $10 trillion debt — that's $10,000,000,000,000 — mean? For one thing, it would require the iconic National Debt Clock in New York to be reprogrammed to handle the extra digit.

The clock was introduced in 1989 and now sits above the entrance of an Internal Revenue Service office in midtown Manhattan. It was created by real estate developer Seymour Durst, who died in 1995, and is now owned by the Durst Organization.

"It will be the first time we've had to make an adjustment so that the clock can handle the next digit," said Jordan Barowitz, a spokesman for the organization.

Under the administration's bailout plan, the government would buy bad debt and mortgage-backed securities off the books of banks. While the assets are considered no good in the financial world, the government could resell them in several years after the housing market has recovered and potentially even make a profit.

That makes the overall impact of the bailout on the national debt difficult to determine, analysts said. But many economists expect the bailout to continue the recent trend of higher debt as a percentage of the whole economy. The current figure of 39 percent is up from 33 percent in 2001.

Scott Lilly, a senior fellow at the liberal Center for American Progress, said U.S. debt levels are lower than among many developed countries. Japan's national debt topped 100 percent of its economy during its decade-long slowdown in the 1990s.

But "it's going in the wrong direction," he said. And depending how the bailout works, it could "go fairly rapidly in the wrong direction."

In a report Monday, Moody's reiterated its triple-A credit rating of U.S. debt, saying the rating is based on the United States' "diversified, flexible and innovative economy and competent policy making."

Top ratings like that help the U.S. borrow at low cost. If Moody's or other agencies, such as Fitch Ratings or Standard & Poor's, were to cut their ratings of U.S. debt, it would likely require the Treasury to offer higher rates. That higher borrowing cost would be borne by taxpayers.

Still, the bailout won't come without costs, according to Hess and other economists, with higher taxes one possible outcome.

Hess noted that the United States has a relatively low tax burden, at about 18 percent of gross domestic product, compared with other advanced economies, so there's room to boost taxes.

"Most likely, the U.S. taxpayer's going to have to foot some of the bill," said Drew Matus, senior economist at Merrill Lynch & Co. Inc.

And Carl Weinberg, chief economist at High Frequency Economics, a consulting firm, wrote in a note to clients that the Treasury will have to offer higher interest rates on its debt to attract buyers in the U.S. and overseas to fund the bailout.

That, in turn, could lead to higher interest rates overall.

"There is no free lunch in this bailout," Weinberg wrote.

___

AP Business Writer Erin Conroy in New York contributed to this article.

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