Heavy debt hampers economic growth, says 200 years of data

Posted on January 14, 2010

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A new report that looked at 200 years of economic data from 44 countries found that a high debt-to-GDP ratio will cripple a country’s propensity to grow economically. Carmen Reinhart and Kenneth Rogoff, economists respectively from the University of Maryland and Harvard, found that there are discrete breakpoints at which debt becomes ever more harmful.

With a debt that is 60% of the national GDP, the rate of economic growth slows dramatically. When the debt is 90%, an economy can barely grow and sometimes contract. Our current ratio? 84%

A new report that reviewed 200 years of economic data from 44 nations has reached an ominous conclusion for the world’s largest economy: Almost without exception, countries that are as highly indebted as the United States is today grow at sub-par rates.The report was written by two respected academic researchers who recently published a thick book on eight centuries of economic crises.

The study by Carmen Reinhart and Kenneth Rogoff — well-regarded economists from the University of Maryland and Harvard University, respectively — found statistical breaks at different points in the relationship between a country’s national debt and its gross domestic product. GDP is the broadest measure of a country’s trade in goods and services.

When a nation’s debt exceeds 60 percent of its GDP, its growth rate slows precipitously, the study found. When that ratio exceeds 90 percent, nations’ economies barely grow, and can even contract.

The U.S. national debt is at roughly 84 percent of the country’s GDP, and it is projected to cross the authors’ 90 percent threshold late this year or early next year.

The implication is stark: The authors don’t say that the U.S. economy can’t grow briskly despite even higher debt, but if it does, it would be an outlier in roughly 200 years of economic statistics.

“We’re racing toward this (90 percent) limit, and maybe it will prove a soft limit for the United States. But not forever,” Rogoff said. “I think it is certainly a cautionary tale.”

Don’t be too quick to jump up and blame Obama for this. You don’t get this kind of debt overnight or even in one year. You also can’t solely blame Bush’s war spending for this either, and the policies of the current administration aren’t helping. The Obama administration posted a $1.4 trillion budget deficit last year, and in 2010 it’s estimated the deficit will grow to $1.55 trillion. That’s not movement in the right direction.

The argument is that the massive stimulus spending (whose effects are still being oversold) is necessary to keep things from being even worse than what they are. Even if that were true, at what point does it become an even worse idea to mortgage your future completely away to save yourself some trouble in the short term? And in this environment, does it make sense to introduce the largest permanent entitlement in history?

A responsible economic policy would call for real budgetary belt-tightening (not token cuts of a few million dollars here and there) and targeted and specific stimulus programs tailored for each sector. Instead we are getting a massive infusion of cash applied wantonly with no concerted effort, and no decrease in budgets since the perception is that in times of economic hardship, government is apparently more essential than ever before.

Obama did not create this problem by a long shot. This is the combined economic neglect of several administrations and the big-government mentality of Congress dominant over the last few decades. The experience of history and of other nations shows us that we can’t afford to take our national debt lightly. Unfortunately, nothing our leadership is doing presently convinces me that they take this matter seriously at all. It’s more important to feel good about our efforts in the present than to worry where it will take us down the road.

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Posted in: News, Politics