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.