Andrew Ross Sorkin had a good piece mocking the Peter Peterson funded Fix the Debt campaign since many of its CEO leaders are now gladly on the tax cut bandwagon. Unfortunately, the piece ends with sermonizing on the need to reduce deficits and debt.

“In the end, Mr. Peterson is right. The country — and businesses — will ultimately do better if the nation’s balance sheet is not bloated with debt. Part of the issue is generating enough revenue from taxes, and part is dealing with costs like health care and entitlements, which the tax overhaul plan does not even begin to tackle.”

There are two ways in which deficits and debt can do actual damage to the economy. The first is the classic crowding out story. This is one in which government spending is pulling away resources from the rest of the economy. It has a lasting impact insofar as this leads to higher interest rates, which in turn reduce investment. The reduction in investment means the capital stock is smaller than it would otherwise be, which means that workers will be less productive. That means less future output and lower take-home pay.

There is also the story that higher interest rates will lead to a higher valued dollar due to an inflow of foreign capital. This means a larger trade deficit. In addition to turning the mix of employment away from items that are traded (i.e. fewer manufacturing jobs), the foreign borrowing associated with this capital inflow means a larger share of future output will be paid out to foreigners as interest and dividends on the assets they own in the United States.

This is a difficult story to tell about the current economic situation. Interest rates remain at historically low levels. The 10-year Treasury bond rate is less than 2.4 percent. This compares to a rate of more than 5.0 percent during the period when we were running budget surpluses in the late 1990s. Inflation is somewhat lower today than the late 1990s (roughly 2.0 percent now, compared to 2.5 percent in the 1990s), but even taking into account differences in inflation rates, real interest rates are considerably lower today than in the years of budget surpluses. In other words, there is not much of a case for the crowding out story.