I was just on a tax panel this AM with my pal Maya MacGuineas. Maya suggested that high debt levels lead to lower economic growth.
Using Richard Kogan’s data on debt as a share of GDP and real GDP/working-age person (which is closer to productivity growth than GDP growth, but seems like a relevant metric here; you get the same results with GDP/person) back to the beginning of time (1792!), here are two scatterplots.
The first plots debt/GDP against this growth measure and the second plots the change in debt/GDP against the same growth measure. Both are largely random plots.
To be clear, this is, of course, nothing approaching conclusive evidence that there’s no relationship between debt levels and growth. Establishing that sort of causality would require a lot more than a few scatters; you’d need control variables and a way to partial out “endogeneity,” meaning the mechanical aspects of this relationship. For example, the economy hits a bump, growth falters, and debt begins to rise, say due to offsetting, counter-cyclical fiscal policy. Then growth picks up along with higher debt levels, enforcing a positive correlation.
But I do believe these figures should prevent one from asserting that public debt erodes growth in the US case. At times it may do so, and others, not. Learning more about those dynamics is what we should be doing, IMHO.
Kogan et al stress the key point that “…policymakers can more easily restore the nation’s fiscal health when the economic growth rate exceeds the average interest rate than vice versa. That’s because, when economic growth rates exceed Treasury interest rates, the burden of existing debt shrinks over time.” That is, g>r is important–you get into debt trouble when your debt (r) grows faster than your economy (g). See, e.g., Greece. In the US case, Kogan et al report that g>r 65% of the time since 1947, by an average 1.3 percentage points.
As I stressed on the panel, I strongly believe one’s views must be dynamic on these issues; one should be what I’ve called a CDSH (cyclical dove, structural hawk). In weak economies, you want your debt/GDP ratio to rise enough to temporarily offset the demand contraction. As the economy moves toward full employment, you want your debt ratio to first stabilize, and then, at full employment, come down. What you don’t want, and I suspect Maya would agree, is ever-rising structural deficits, no matter what’s happening in the economic cycle.
And what you really, really don’t want are big, regressive, wasteful tax cuts that exacerbate the debt for no good reason, while worsening after-tax inequality.