(MONEY Magazine) – Federal Reserve Board chairman Alan Greenspan recently surprised almost everyone when he reversed his view that the nearly half-trillion-dollar federal budget deficit is a threat to the American economy. Greenspan now says that factors such as increasing individual wealth enable the nation to carry more debt than was possible two decades ago.

Greenspan did not elaborate on his election-year conversion. His reversal on the dangers of the deficit was not only surprising but invited sharp disagreement from many of the country's most respected economists.

I talked with Benjamin Friedman, the William Joseph Maier Professor of Economics at Harvard University, about why he believes the size of our federal deficit, as well as our reliance on foreign capital, could be detrimental to our prosperity.

DOBBS: Does a deficit of the size the federal government is now running threaten the economy's prospects?

FRIEDMAN: Yes, it does. A large deficit, maintained even when the economy is at full employment, causes private firms to invest less in productive plant and equipment--factories and machinery--than they otherwise would. Over substantial periods of time, investing less means that American workers will have fewer tools to do the job, and they will therefore become less productive than they otherwise would be. In other words, their productivity will grow less rapidly, the economy will grow less rapidly, real wages will grow less rapidly, and the standard of living will grow less rapidly. That's a large part of why a deficit of this magnitude, even at full employment, is bad for the economy.

Q. And how can the deficit affect the average American family?

A. It affects the average American family's wages and income. Over time, having less investment in productive plant and equipment means less growth in productivity and therefore less growth in the average worker's wage.

So the average family will see less income coming in than it would otherwise, and therefore enjoy less improvement in its standard of living than it would otherwise.

Q. Do you think that the U.S. is too reliant on foreign capital? And if so, will that impede our economic growth prospects?

A. Yes, we are overreliant on foreign capital. The risk, I think, is not that we will grow less as a result. The risk is in two other forms. First, the foreigners who lend money to us are not just being charitable; they expect to earn a return on what they lend. Over time, the more we owe to foreigners over and above what they owe to us, the more of our national income and product has to be devoted to servicing these debts. So it will be a drain against our income.

The second problem is more subtle and, I think, more important. History shows that over long periods of time, influence in world affairs accrues to countries that are creditors--in other words, countries that are lending their capital for deployment elsewhere in the world--and not to countries that are borrowers, reliant on foreign lenders. Now so far, because our military might is so outstanding compared with any other country in the world, we're doing pretty well in terms of international influence, despite the fact that we are so reliant on borrowing from abroad. But over a long period of time, I doubt that this is sustainable.

LET'S GET OUR HOUSE IN ORDER

In my view, our rising deficits and national reliance on foreign capital, whether sustainable or not, are imprudent, unwise and irresponsible. The President and Congress must decide soon whether the United States is to be a debtor nation in perpetuity. And I believe they should explain to voters in this election year the economic and social impact of their choices or, alternatively, why they're avoiding the economic decisions so critical to the nation's future.