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Chart of the Week: High Public Debt Damages Economic Growth

Posted By T. Elliot Gaiser On February 16, 2013 @ 12:00 pm In Economics | Comments Disabled

When President Obama says he wants “a smarter government that sets priorities and invests in broad-based growth,” he means more government spending. This is why his State of the Union provided a laundry list of new government initiatives that will require new government spending.

As Heritage expert Romina Boccia demonstrates [1] in a new paper, the problem is that government spending that leads to massive debt actually damages economic growth in the future.

[2]

Even without a Greek-style debt crisis, high levels of debt held by the public hamper economic growth and reduce opportunity in America. According to Boccia [1]:

A full-fledged fiscal crisis hits a country with the same force as a patient suffering severe trauma. However, a no-drama debt overhang that reduces growth slowly drains the life from the patient, like a long-term disease. The U.S. should not delay adopting a credible strategy to resolve chronic deficits and debt, lest it find itself on the stretcher.

Slower economic growth is not an abstract concept. It is a real threat that will harm real people by preventing job creation. It means fewer “Now Hiring” signs and growing stacks of resumes for a shrinking number of available positions. It means fewer people participating in the work force, less pay, and less opportunity, especially for those trying to climb the economic ladder.

One reason high debt harms growth is that government spending crowds out private investment and impedes entrepreneurship. When the federal government spends more money than it takes in, it issues debt, which shows up as deficits. Both foreign governments and private investors purchase this federal debt [3], which means money that could have gone to investing in new businesses pays for government spending instead.

This is why more government spending, like that advocated in Obama’s State of the Union, actually equals fewer resources for entrepreneurs and less of the innovation that creates opportunity in America. High public debt means fewer future iPhones, medical advancements, and fuel-efficient vehicles [4].

This is economic reality, not some far-off theory. Just look at Greece [5] or Japan to see the impact national debt has on a nation. In fact, Japan’s debt is preventing its stagnant economy from recovering. As Derek Scissors writes, [6]

Now the single biggest reason why Japanese private consumption and investment are weak is that government borrowing has hollowed out the economy.Japanrose for four decades on the back of household saving and a corporate sector that was increasingly competitive internationally. Now household saving goes straight into government spending that has no economic return and the corporate sector is fleeing Japan for environments that have more to offer than public finance.

The idea that government spending stimulates economic growth is a failed myth [7]. Deficit spending that adds to the debt actually risks creating higher interest rates for home owners and costly inflation that makes everything, from food to college tuition, more expensive.

America owes it to our children and grandchildren to take the necessary steps to ensure debt does not destroy our future. That’s why Congress should balance the budget over the next decade [8] and begin the important work of restoring America’s Opportunity for All [9] immediately.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2013/02/16/chart-of-the-week-high-public-debt-damages-economic-growth/

URLs in this post:

[1] As Heritage expert Romina Boccia demonstrates: http://www.heritage.org/research/reports/2013/02/how-the-united-states-high-debt-will-weaken-the-economy-and-hurt-americans

[2] Image: http://blog.heritage.org/wp-content/uploads/BL-debt-and-econ-growth.jpg

[3] federal debt: http://www.heritage.org/federalbudget/debt-and-deficits

[4] fuel-efficient vehicles: http://blog.heritage.org/2013/02/13/obama-has-not-doubled-the-nations-fuel-economy/

[5] Greece: http://blog.heritage.org/2012/06/18/morning-bell-the-grecian-formula-for-economic-decline/

[6] As Derek Scissors writes,: http://blog.heritage.org/2013/02/14/japans-economy-what-really-matters/

[7] is a failed myth: http://www.heritage.org/research/reports/2010/01/why-government-spending-does-not-stimulate-economic-growth-answering-the-critics

[8] balance the budget over the next decade: http://blog.heritage.org/2013/02/01/morning-bell-how-to-balance-the-budget-in-10-years/

[9] restoring America’s Opportunity for All: http://opportunity.heritage.org/

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