Our Massive National Debt: Was That Wrong? Should We Not Have Done That?
Remember that time back in college when you threw $47,000 on your Visa card for Natty Light and trips to Cancun, and all you really got in return was a mild case of alcohol poisoning and a burning sensation when you pee? Yeah, Visa probably should not have extended that much credit to a 19 year-old. And you probably should have known better than to hit on someone with a tramp stamp the size of your carry-on luggage. It was a valuable growth opportunity.
Well, it turns the governments of the world are going through a similar learning experience right now. In a recently released paper for the National Bureau of Economic Research, researchers Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff find that high public debt is associated with a significantly lower level of GDP in the long run. The researchers looked at historical incidences of high government debt levels in advanced economies dating back to 1800, specifically examining 26 different “debt overhang episodes” in which public debt levels were above 90 percent for at least five years — everything from the Napoleonic War debts incurred by the Netherlands in the 1800′s to Greece’s current fiscal crisis.
You might be shocked to learn this, but researchers found that these debt overhang episodes tended to leave a bit of a burning sensation for these governments. Growth during the periods of high debt was 1.2 percent lower on average. But, more significantly, high debt is also the gift that keeps on giving: these episodes of high debt and lower growth lasted 23 years on average. “By the end of the median episode, the level of output is nearly a quarter below that predicted by the trend in lower-debt periods,” researchers found:
So now governments across the globe are all “Wait, running massive national deficits year after year after year was a bad thing? What? Was that wrong? Should we not have done that? We tell you, we gotta plead ignorance on this thing, because if anyone had said anything to us at all when we first started here that that sort of thing was frowned upon…you know, ’cause we’ve worked for a lot of different governments, and we tell you, people do that all the time.”
But the researchers were quick to note that their findings should not be interpreted to mean that governments should never incur deficits or should take draconian measures in alleviating their current obligations (Woohoo, Acapulco 2013!!!). They warned that they are not making a case “for rapid public debt deleveraging in an environment of extremely weak growth and high unemployment.” Rather, as Ezra Klein notes, such findings simply “strengthen the case for tackling the long-term deficit in the United States, where the debt-to-growth ratio shot past 101 percent in February.”
Photo: Wallyg/flickr
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