Free Markets, Free People


Government debt is a drag on the GDP? D’oh, who knew?

Well, we did.  We’ve been telling you that for quite some time.  And so have other economists (that, of course, wouldn’t include Paul Krugman).

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?

 

Debt to GDP

 

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)!

~McQ

Twitter: @McQandO

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15 Responses to Government debt is a drag on the GDP? D’oh, who knew?

  • Well, just “Shazaam”…
    I mean, who knew…???  (Besides EVERYBODY not in the Collective…and even a few of them as are.)
    But Krugman is out flacking for space invaders from the planet LIES to boost the economy.  Outside of the Cocoon, does ANYBODY regard this guy as anything but a clown?

  • Taking money from the private sector to create more government, not to mention the government giveaways….how could that possibly be a drain on the economy?   Sheesh….such fantasies.  Everyone knows more government means more money for everyone!

  • A summary of leftist economic and public policy
    1. Spending money you don’t have is the way you get out of debt.

    2. You get economic growth by hiring government employees.

    3. Rich people don’t respond to incentives. When you raise their taxes, they just pony up, giving the government more money.

    4. Poor people don’t respond to incentives. When you make government benefits available with few strings attached, they don’t game the system until it breaks.

    5. Government workers don’t respond to incentives (I). A pay structure that pays more to those who have a lot of people working for them won’t cause public sector employees to inflate their staffs with unnecessary people.

    6. Government workers don’t respond to incentives (II). Public sectors workers in an agency to solve problem X really do want to solve problem X and will work hard to do so, even though if they succeeded they would be out of a job.

    7. Criminals don’t respond to incentives. Possession of guns by potential victims does not affect a criminal’s decision about commiting a crime.

    8. You get better education by hiring a lot more people who are not teachers and making darn sure that incompetent teachers can’t be fired because of restrictive union rules.

    9. People who have never run a business, or even worked for a business, are much more competent to make rules that businesses must follow than people who actually own and run businesses.

    10. Even though the government spends a third of the money in the economy, you can still get money out of politics by passing enough laws and rules.

    11. Public sector unions who spend huge sums of money on elections are just being public spirited and participating in the democratic process. Private corporations who spend huge sums of money on elections are trying to subvert the democratic process and must be stopped at all costs.

    • Excellent!

      May I suggest 12. The ultimate monopoly…government…is different than all private monopolies, and good.

    • 9. People who have never run a business, or even worked for a business, are much more competent to make rules that businesses must follow than people who actually own and run businesses.

      More then that. Bureaucrats who have never run a buisness and who have no skin in the game make better financial decisions then those with actual experience and actual wealth on the line.

    • If boosting aggregate demand is what’s needed, why bother creating jobs? Uncle Sam can simply send every unemployed person a generous check with the proviso that it can’t be saved. It must be spent on TVs, cars, dresses, and shoes (that’ll get the female vote). Call it the  “Stay at Home and Pamper Yourself” economic recovery plan.
      Obviously, this would be absurd. But is paying people to do governmental busy-work any less absurd than paying them to do no work? No.
      Every (unsubsidized) job in the private sector exists because it generates more in wealth or value than it consumes in resources—and hence grows the economic pie. That’s not the case with the public sector.

  • What is interesting about the left is that they will argue that Clinton balanced the budget. But they really don’t want or care about balanced budgets. Back in the 90s when Clinton was trying to PREVENT the “balanced budget” (never really balanced because they borrowed from SS), the left had his back. But fast forward a decade or so and the claim the Clinton balanced the budget and mean W unbalanced it is standard belief on the left, or at least a standard (if ignorant) argument.

  • Unemployment is still high, the economy is still shaky, and the President still wants to spend more taxpayer money on temporary jobs.
    The CBO reported that the federal budget deficit for this year will be $1.1 trillion (http://1.usa.gov/xju6K9). That number is in addition to total debt over $15 Trillion and projections that by 2021 federal debt will be over $20 trillion (http://1.usa.gov/wt4DPi).
    Do we really want to get further into debt by spending taxpayer money on failed policy?

    • Obviously it makes sense to pump money into temp jobs, since that can drive down unemployment numbers and give people warm fuzzies about the economy . . . two things Obama wants goin into November.

      After November? Who cares? It’s golf, Kobe beef and exotic vacations for the first family.

  • Here I am with the Lefty comeback!!!!!!
    You have the correlation but your causation is backwards!
    Bad economic times means government must spend more, thus more debt!!!!!!!

  • In an awkward moment during the Take Back the American Dream conference, liberal activists applauded when MSNBC’s Chris Hayes raised a thought experiment in which New York Times columnist Paul Krugman was dictator with the ability to impose his preferred economic policies.

    I guess because Progressives are the stalwarts of democracy.  (cough .. cough .. cough)

  • I’m sure of a correlation but not so sure about a consistent causation.  I mean when the economy took a dump in 2008, revenue fell $300 billion.  So without doing anything the debt increased faster.  Of course Obama piled on that.  But that first $300 bln would be a case where the economic downturn caused the debt, not the reverse.

    The point where debt hurts the economy is when debt payments get out of control and almost self-sustaining or create a death spiral with the deficit.  We’re on a precipice of the that.  Otherwise, its taxes that are the drag.

    Just sounds like people are over-promising what is going to happen if the deficit spending was ever ended.  We have to stop it because of the looming disaster 5 (Obama) to 10+ (Romney) years from now.  If anything its going to hurt a little with the disruption of the flow of money.  Taxes on the other hand would give immediate improvement but with the risk of increasing the deficit which could be worse in the long run.

  • Unless I missed it, I think MQ forgot to include the final statement of the study, “But the authors also warn that their paper shouldn’t be interpreted as a manifesto “for rapid public debt deleveraging in an environment of extremely weak growth and high unemployment.””  In other words, pay heed to scientific dictum, ‘correlations of past data are not necessarily predictors of  future events’—especially in the social sciences—and certainly doesn’t define the appropriate remediation.  The recent firing of teachers, fire-fighters, and police—in the name of austerity—resulted in reducing the demand market and increasing unemployment.

    • That’s why we put links on the pages, Tad. And that’s a pretty boilerplate disclaimer as anyone who understands such things would know and also know that it has absolutely nothing to do with the point of the article. We didn’t even touch on “rapid public debt deleveraging”, we were talking about the drag public debt has on GDP. Or did you miss that?