Government debt is a drag on the GDP? D’oh, who knew?
Yesterday, this came out (and, most surprisingly, on Ezra Klein’s blog, although not by Ezra Klein):
What’s the real harm of a massive government deficit? 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.
In a new paper for the National Bureau of Economic Research, the researchers examined the historical incidence of high government debt levels in advanced economies since 1800, examining 26 different “debt overhang episodes” when public debt levels were above 90 percent for at least five years.
And what do you suppose they found?
The debt episodes included everything from Netherlands’ Napoleonic War debts and the Japan banking crisis of the 1990s to Greece’s current fiscal crisis. On average, the researchers found that growth during these periods of high debt were 1.2 percent lower on average, consistent with Reinhart and Rogoff’s findings in 2010. What they also found, however, was these episodes of high debt and lower growth were quite lengthy, averaging 23 years. And the accompanying long-term drag on GDP was substantial. “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,” they explain.
Japan’s “lost decade” has lasted much more than a decade, hasn’t it?
And the policies being pursued by this president seem to be offering up an attempt to see if this country can’t move that average beyond 23 years.
Need a picture?
We’re at 101% of debt/GDP so, according to these folks, we’ll actually perform below the red line.
But hey, more spending please. Because, you know, we need more government jobs (the private sector is doing fine).
Forward (into economic oblivion)!