Perhaps not for the reasons you think.  While high national debt correlates to low levels of growth, it may not be for reasons that politicians suppose.  A new paper by Ugo Panizza and Andrea Presbitero say many policymakers are misunderstanding what’s really going on with debt and growth.  The mechanism by which this relationship manifests itself may be related less to a failure of financials but rather a failure of policy.

We do confirm the oft-noted negative correlation between debt and growth, but show that debt does not have a causal effect on growth … we do not find any evidence that high public debt hurts future growth in advanced economies. Therefore, given the state of our current knowledge, we believe that the debt-growth link should not be used as an argument in support of fiscal consolidation.

Or, put another way, high levels of debt create a policy feedback loop that drives leaders to adopt policies of austerity out of the imagined fear of high debt which in turn causes an economic slowdown.  A self-fulfilling prophecy if ever I saw one.

This would be a perfect time to remind people that the Ryan budget is European austerity for America.  Perhaps that would not be the best option at this point.

3 Responses to Why are High Levels of National Debt a Problem?

  1. Cat Kin says:

    If, heaven forbid, the Republicans regain control of the White House and both houses of Congress, you will not hear again about our large debt, except in the usual “kick-the-can” language, blaming “tax and spend Democrats” and “terrorist threats.” Huge debt puts us in the grasp of foreign investment and Wall Street influence, eroding liberty, job creation and our environment.

  2. Memory Man says:

    Since I’m not a world economist, I wouldn’t presume to comment on how the Eurozone situation correlates to what’s going on here in the U. S. of A. All I know is that our treasury used to have unlimited borrowing ability, at the lowest interest rates available. That was before the 112th Congress and a lot of GOP lies and dug-in heels.

    “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

    It’s all about confidence. Back when nobody questioned the US’ ability to pay its debts, it wasn’t because of sentiment or “deficit” or any other misused buzzwords. It was simply because the US had enough industry in place to produce as much as was needed.

    Whenever there was an economic downturn in the US, the wise lenders opened their coffers to fuel the mighty engine of industry, whose tax dollars kept the US dollar as good as gold…maybe even better. Through boom and bust that faith was always there. Even through the Great Depression our creditors knew that American industriousness would build our way out of it. And so it did.

    But that was then and this is now. And we don’t have much industry left here in the US. Most of that mighty engine was dismantled and sold off as scrap to make a quick buck for people like Willard Romney. Because of that we’re on the razor’s edge. There’s still faith in our ability, but the ‘party of no’ has given our creditors legitimate reason to doubt that this country has the will to earn its way back.

    “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

    • Phil Scarr says:

      Since I’m not a world economist, I wouldn’t presume to comment on how the Eurozone situation correlates to what’s going on here in the U. S. of A.

      That’s good, because it doesn’t. The Eurozone is a classic example of why you dont’ separate fiscal and monetary policy. The US, as a sovereign currency issuing nation does not face the same constraints as the members of the Eurozone who do not issue their own currency but rather use currency issued by the ECB.

      All I know is that our treasury used to have unlimited borrowing ability, at the lowest interest rates available. That was before the 112th Congress and a lot of GOP lies and dug-in heels.

      Technically, the treasury doesn’t have to “borrow” anything. It can simply create currency through the push of a key on a keyboard. That, in fact, is exactly what they did during the last two rounds of Quantitative Easing.

      It’s all about confidence.

      In actuality, it’s not about confidence at all. It’s about understanding how macroeconomics is not like balancing your checkbook and basing your policies on reality rather than convenient fictions (like confidence!). 🙂

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