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  • Angry Voters Are Right: Growing Debt Can Slow the Economy

    Political candidates apparently can choose no better campaign issue this year than excessive government spending and the exploding debt it’s producing.  In one campaign after another, voters high and low on the economic ladder respond in the same way when challengers berate incumbents for reckless debt accumulation: raucous, fist-pumping applause and that same grimace that must have graced the faces of our revolutionary forebears.

    This prime issue of the 2010 election season no doubt will be the subject of analysis by students of politics for years to come. Even now, however, we know something. Anyone who ponders the question of why voters are so hot about public sector debt will quickly discover that otherwise diverse voters are relatively united in their apprehension that ballooning sovereign debt threatens our economy.

    Are voters right to be so worried about how rising debt threatens their economic future, or are some politicians and most pundits right that, once again, the voters’ emotions have won over their reason?

    Well, it turns out that the voters are right, if new research from Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University stands up under academic scrutiny.  Reinhart and Rogoff study the relationship between rising debt levels, inflation and economic growth rates for 44 developed and developing countries. Their dataset contains 3,700 annual observations across a wide range of political and economic settings.

    What did they find? For the period 1946 through 2009, developed countries (which includes the United States) grew at an annual rate of just shy of 4 percent when debt was no greater than 30 percent of GDP. For debt burdens above 30 but below 90 percent, economic growth slowed down but remained, on average, around 3 to 3.5 percent per year. However, a debt burden of over 90 percent of GDP was associated with a significantly slower economy: the average growth rate is negative and the median rate is just at 2 percent.

    When Reinhart and Rogoff focused just on the U.S., the association of high debt burden and economic slowdown becomes even more pronounced. They use data from 1790 through 2009. When debt rises to 90 percent of GDP, both the average and the median economic growth rates are negative and the inflation rate skyrockets to above 5.5 percent.

    What makes this research so telling is the commonly accepted prediction that U.S. sovereign debt is on its way to 100 percent of GDP and doing so quickly. The International Monetary Fund predicted that total U.S. government debt would reach that level in 2015, just four years from now. The Congressional Budget Office forecasts that debt will be above 90 percent by 2020. If one adds in the debt U.S. government agencies owe one another, the U.S. debt could be above 100 percent next year.

    No wonder voters are angry about the growth rate in public debt. Given that most elected policy makers continue to borrow for current spending, maybe the voters know something the politicians have yet to learn.

    Posted in Economics [slideshow_deploy]

    3 Responses to Angry Voters Are Right: Growing Debt Can Slow the Economy

    1. Pingback: » Financial News Update – 06/10/10 NoisyRoom.net: The Progressive Hunter

    2. Bob S., Seattle says:

      The paper only proved that debt and low economic growth are associated, not that the former causes the latter. A more plausible theory is the opposite, that low economic growth causes increased debt. Low economic growth is usually a result of a recession (or depression), which decreases government revenue causing it to turn to deficit spending to cover its obligations.

      Also, nice graph. Apparently the 'War on Terrorism' ended sometime last year, by your reckoning. Does that mean we can bring the troops home from Iraq and Afghanistan and save several hundred billion dollars?

    3. Scott D. Utah says:

      Bob S., there is some logic in your response. Yes the economy slows and expenditure due to obligation should remain the same even though the revenue is not as large.

      You are ignoring the obvious. When an individual does not have the money, a responsible individual stops spending. The current administration and both houses have lost all sense of responsibility (that is assuming that they had it in the first place) by creating enormous additional deficit spending on top of the exisiting obligations.

      The scenario in Washington is identical to the individual that maxes out all of their credit cards because they know they are going to file bankruptcy anyway. The rest of the consumers have to pick up the tab. That individual is spending other's money as well.

      Where does the US go when we have no more money? What happens when the hand outs dry up because the government is broke and so are the people that subsidize the government? Take a look at Greece.

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