[Humjob]

If government debt grows high enough then an increasingly large percentage of federal spending will be devoted to paying interest on that debt rather than on arguably more useful areas which create future prosperity, such as education and scientific research.

After a certain point this becomes unsustainable and bad things start to happen, ranging from total political & economic collapse (Germany in the 1920s) to hyperinflation (Zimbabwe) to, in the best of the worst case scenarios, a large default/restructuring and subsequent downgrading of a country's debt to junk status (Argentina in the 2000s).

As F.A. Hayek, Milton Friedman and numerous other economists have written, government spending tends to be more inefficient than the free market because the government isn't constrained by profits and losses, which are society's way of indicating whether a company is producing goods and services that are valuable and desired. Of course, there are some goods and services that only the government can provide well, and the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient. However, it's undeniable that at a certain level (almost certainly a level below our current level of spending in my opinion) each marginal dollar the government sucks out of the economy is used less efficiently than it would have been used if it remained in private hands.

[AJ007]

Something to consider is the difference between debt denominated in a countries' own currency verse that of another country.

In 2010 Germany finally repaid debt it had raised to pay its World War I reparations. The reparations never were paid in full but you damn bet the US dollar denominated debt was.

If a country borrows money in a foreign currency they may have bills due for an incredibly long time unless the creditors says "ok, you can pay less than you owe us." The EU members are in this position because the bills they owe are not in their own currency.

Generally this seems to have the biggest impact on tiny countries. One of the most interesting opinions I've heard recently is from James Rickards who was a negotiator for the Long Term Capital Management bailout in 1998. His opinion is the risks in the banking system have increased, not decreased, and when the next failure happens the US government will not be capable of a bailout largely due to the Federal Reserve's balance sheet leverage (which puts Lehman's leverage to shame) and a lack of political will to write a multi-trillion dollar check. What will happen is debt issued and denominated by the IMF, the only bank in the world left with a good balance sheet.

[MaysonL]

Next time what should be done (but probably won't) is to take over the insolvent banks, prosecute the fraudsters, and allow mortgage debt to be reduced in bankruptcies, perhaps converted to equity. The US federal government assets are certainly an order of magnitude (possibly two) bigger than the Fed balance sheet, so to talk of leverage is laughable.

[dragonwriter]

> the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient.

Its often presented that way -- almost exclusively by people on the right, however -- but as I see it the left/right debate is less about fact questions (even somewhat fuzzy ones like the efficiency question you propose) and more about the ethical/moral/value issue of what is the purpose of government.

[jeffdavis]

"the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient"

I disagree. It's more about a notion of "fairness": whether you think that the government can improve fairness, in what situations, and at what cost of efficiency.

[muzz]

Here is a chart of that percentage over time:

http://research.stlouisfed.org/fred2/series/FYOIGDA188S