Does Federal Debt Hurt the Economy More Than We Thought?

New Evidence on Debt as an Obstacle to US Economic Growth

High debt levels will have serious consequences for the future of the US economy. However, the country’s current debt is not just a looming problem—it is hurting the economy now. This is the case made by Thomas Grennes, Michael Fan, and Mehmet Caner in “New Evidence on Debt as an Obstacle to US Economic Growth.” Debt levels are already reducing the rate of growth by more than 1 percentage point a year and, absent major fiscal reform, will continue to do so.

Past increases in US government debt have generally occurred during times of war and have subsequently reverted back to prewar levels. Since 1968, however, debt relative to the size of the economy has increased continuously. In 2017, for example, US debt amounted to 105 percent of GDP.

This study addresses the following issues related to US debt levels:

  • How debt is currently hurting the economy. Growing empirical evidence shows that US government debt has now become so large that it is having a significant negative effect on economic growth. This debt has been reducing annual growth since 2008.
  • Why slow growth, not default, is today’s debt-related problem. The defenders of big debt identify the danger of default as the problem and correctly argue that such danger is not imminent. Defaults are associated with interest rate increases that are high relative to historical averages or to other countries. However, US interest rates are not increasing in this manner, and there is no evidence that the country is expected to default. Slower growth is the immediate problem, one that the defenders of debt have ignored.
  • What is needed to address the debt. Americans have acquired a habit of wanting government spending that they are unwilling to pay for through taxation. The country’s current chaotic fiscal policy is producing government debt that continues to rise without limit. It is time to recognize the costs of the current approach and consider some form of fiscal rule that would limit the debt.

Key Takeaway: Americans are Already Being Harmed by High Levels of Debt

The current US business expansion began at the end of the Great Recession—but because of the debt problem, the growth rate has been significantly stunted during the past decade. Recognizing and eliminating the debt problem provides a rare opportunity to raise the standard of living for average Americans. It is also an important opportunity for bipartisanship. Both political parties have contributed to today’s debt problem, and both parties can help drive reform.

1 Like

Important distinction here in that spending MUST be cut in order to get back in control. We simply cannot continue taxing ourselves into prosperity and giving more and more of that same money to takers who don’t contribute. The holes need to be plugged before we can attempt to bail out the boat (and the last thing we should be doing is adding holes) or we’ll just continue to sink.

It’s all about spending.

Year after year we collect record taxes and yet spend even more. One would think the politicians would taper back a bit in good times. That has yet to happen. Got to buy the votes.

Perhaps it is simplistic of me but I look at government spending and debt in the same way as I view my own. The same principles should apply, no?

My overhead is X and I need Y to support it at a very minimum.

The economy is bad, I still need Y.

The economy is good, I need Y but now I have Z which I spend a portion on for improvements. A larger portion is set aside to get through a bad economy (which is always inevitable but to what degree is unknown) so I can still maintain Y.

Z should be used to reduce Y, such as paying off debt with interest so there is more Z going to improvements and savings/investments.

The missing factor is that when the government overspends it creates debt which devalues the dollar.

Eventually they will reach the point that we reach when we overspend, no on will extend credit (buy treasuries) unless there’s a risk premium added. Until then pay on Garth. The piggy bank is available to buy lots to ensue their continued power.

A purchase of 1.00 in 1913 today costs over 25 bucks. That’s a devalued dollar.

The devaluation of the dollar. Good point, LouMan.

Yet, the dollar would not be devalued given X, Y and Z would it?

The more you print to pay the bills and loan out, the lower the value of the dollar.

1 Like