Economists debate the risks of high national debt, with concerns about debt affecting economic growth. Analysis shows growth slows once debt exceeds 90% of GDP. The episode explores the US's $26 trillion debt, challenges policymakers face, and the balance between tax hikes and budget cuts.
High national debt above 90% of GDP may lead to significantly lower economic growth rates.
Debates ensue on the interpretations of the 90% debt threshold and its implications for economic growth.
Deep dives
Debt and Government Spending Strategies After the Financial Crisis
In 2009, following the financial crisis, the US government focused on increasing government spending and reducing taxes to stimulate the economy. The government's strategy included bailing out banks, tax cuts, and investing in infrastructure. Initially supported, this approach faced criticism from deficit hawks concerned about the growing national debt as it escalated from $6 trillion to $11 trillion by 2012. This rapid increase in debt raised concerns about interest costs and potential snowballing effects.
The Reinhardt and Rogoff Paper's Impact on the Debt-Growth Debate
The 2010 paper by Carmen Reinhardt and Kenneth Rogoff, 'Growth in a Time of Debt,' examined the correlation between high debt levels and economic growth across advanced economies. The paper suggested that countries with debt above 90% of GDP experienced significantly lower growth rates. However, debates ensued regarding the interpretations of the paper's findings, especially surrounding the 90% threshold and its actual implications for economic growth. The paper led to significant discussions on austerity measures and the relationship between national debt and economic performance.
Challenges in Determining the Effects of National Debt on Economic Growth
Economists continue to debate the causality between high levels of debt and economic growth. The importance of factors like debt composition, borrowing currency, and debt ownership in assessing the impact of debt on growth is acknowledged. The complexity of these interactions has led to challenges in definitively determining when debt levels become problematic for an economy. Empirical evidence suggests varying impacts of debt on growth, with different thresholds for different countries based on several economic factors.
Most economic textbooks will tell you that there can be real dangers in running up a big national debt. A major concern is how the debt you add now could slow down economic growth in the future. Economists have not been able to nail down how much debt a country can safely take on. But they have tried.
Back in 2010, two economists took a look at 20 countries over the course of decades, and sometimes centuries, and came back with a number. Their analysis suggested that economic growth slowed significantly once national debt passed 90% of annual GDP... and that is when the fight over debt and growth really took off.
On today's episode: a deep dive on what we know, and what we don't know, about when exactly national debt becomes a problem. We will also try to figure out how worried we should be about the United States' current debt total of 26 trillion dollars.
This episode was hosted by Keith Romer and Nick Fountain. It was produced by Willa Rubin and edited by Molly Messick. It was fact-checked by Sierra Juarez with help from Sofia Shchukina and engineered by Cena Loffredo. Alex Goldmark is Planet Money's executive producer.