Economists See No Crisis With Debt
Washington — Rep. Paul Ryan, chairman of the House Budget Committee, declared this month that the U.S. national debt “is hurting our economy today.” It’s an idea embraced by almost every Republican and even some Democrats.
Economic data — on jobs, housing and investment — don’t support that claim. And economists across the political spectrum dispute the best-known study of the subject, by Carmen Reinhart and Kenneth Rogoff, which found that nations with debt loads greater than 90 percent of their economies grow more slowly.
Three years after a government spending surge in response to the recession drove the United States past that red line — the nation’s $16.7 trillion total debt is now 106 percent of the $15.8 trillion economy — key indicators reflect gathering strength. Businesses have increased spending by 27 percent since the end of 2009. The annual rate of new home construction jumped about 60 percent. Employers have created almost 6 million jobs.
And with borrowing costs near record lows, the cost of paying off the debt is lower now than in the year Ronald Reagan left the White House, as a percentage of the economy.
“The argument that heavy debt loads slow economic growth doesn’t hold a lot of water,” says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia who oversees $12 billion. “It suffers from a mix-up of cause and effect: When weak economic conditions arise, it tends to encourage deficit spending, which is what has led to more U.S. debt being issued, and not the other way around.”
Republicans like Ryan of Wisconsin, joined by Democrats such as former Senate Budget Committee Chairman Kent Conrad of North Dakota, embrace as economic gospel the idea of a tipping point for debt, even as it is hotly debated among economists.
Some studies have found no evidence that high debt inevitably chills growth — especially for countries like the United States that print their own currency. One 2012 paper by two French economists even concluded that growth rates increased as the debt-to-GDP ratio passed 115 percent.
“The Rogoff-Reinhart 90 percent is really quite a fragile number,” says Joseph Gagnon, a former economist in the Fed’s monetary affairs division. “There is no threshold like that for countries that have control of the currency they borrow in.”
Reinhart and Rogoff said in a 2010 paper that once debt rises beyond 90 percent of gross domestic product for advanced economies, median growth rates are 1 percentage point lower. The U.S. passed the 90 percent mark in early 2010, according to the International Monetary Fund.
“Across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes,” Reinhart and Rogoff wrote, drawing on data from 44 countries over a 200-year period.
Rogoff declined to comment for this story, and Reinhart didn’t respond to emails or telephone requests.
To be sure, the U.S. economy is expanding only slowly. Growth over the past three years has averaged 2.2 percent compared with an average of 2.5 percent between 1989 and 2009. And the recent stirring could fizzle, either because of government spending cuts or what Federal Reserve Chairman Ben Bernanke described at a March 20 news conference as the economy’s “tendency for a spring slump.”
And while there’s no way to know whether the economy would be expanding faster if the debt burden were lower, the traditional way that government debt hurts growth is by raising the cost of money as public sector borrowing “crowds out” private borrowers. That isn’t happening.
Even as the U.S. continues borrowing to cover this year’s projected $845 billion deficit, bond markets remain untroubled. Thursday’s 1.91 percent yield in New York on the 10-year Treasury note was lower than on the day President Obama was sworn in for his first term. It’s lower than on Aug. 5, 2011, when Standard & Poor’s lowered the U.S. credit rating. And it’s well below the 5.3 percent average over the past 25 years.
“Financial markets are begging the government to borrow at negative real interest rates for 10-year maturities,” says Gagnon, now at the Peterson Institute for International Economics. “There’s no way our debt is slowing us today.”