Economists Carmen Reinhart, Vincent R. Reinhart, and Kenneth Rogoff (from here on out referred to as R3) have a new study out looking at the economic impact of high debt levels:
– We identify 26 episodes of public debt overhang–where debt to GDP ratios exceed 90% of GDP–since 1800. We find that in 23 of these 26 episodes, individual countries experienced lower growth than the average of other years. Across all 26 episodes, growth is lower by an average of 1.2%.
– If this effect sounds modest, consider that the average duration of debt overhang episodes was 23 years. In 11 of the 26 high debt overhang episodes, real interest rates were the same or lower than in other periods.
– Obviously, it is possible that new developments in technology and globalization will provide such a remarkable reservoir of growth that today’s record debt burdens will eventually prove quite manageable. On the other hand, the fact many countries are facing “quadruple debt overhang problems”—public, private, external, and pension–suggests the problem could in fact be worse than in the past, a question we do not tackle here.
– Nor have we paid attention here to the likely possibility of significant “hidden debts”, especially public sector, which Reinhart and Rogoff (2009) find to be a significant factor in many debt crises, and as documented in detail in the Reinhart (2010) chartbook. Another line of reasoning for dismissing concerns about public debt and growth is the view the causality mostly runs from growth to debt.
– Our analysis, based on these cases and the 23 others we identify, suggests that the long term risks of high debt are real.
This paper represents a deeper dive into the issue than previous research by Rogoff and Carmen Reinhart, though their general conclusion — high debt lowers growth — is the same. And the chart at the top of the post shows the cumulative impact of years of slower growth. There’s a big different between having a $21 trillion economy in 2035 and a $28 trillion one. Anyone have use for an extra $7 trillion?