Don’t Hit Snooze on the Debt
Salim Furth /
The national debt is a few years away from an unprecedented peacetime explosion, according to the Congressional Budget Office (CBO). Without serious fiscal restraint, public debt will reach 80 percent of gross domestic product (GDP) in 2022 and then explode to 190 percent of GDP in 2038, around the time when today’s college students are reaching their peak earning years. Even with mild fiscal restraint and no expensive crises—wars or deep recessions—in the next half-century, debt is set to grow to 190 percent of GDP in 2072.
Of course, the future is not guaranteed: The CBO’s projection assumes that growth continues much as it has the past century. But a sovereign debt crisis or a “lost decade” like Japan’s—currently in its 24th year—would make things a lot worse.
Will that increase in debt hurt America’s prospects for future growth? Or, as President Obama seems to believe, is the best path to growth to go further into debt to pay for “investments” in the usual government goody bag?
After a spate of academic research in the past few years, which Heritage has previously discussed, there is not much room for disagreement on the link between debt and growth. Everybody agrees there is a strong correlation between high debt and low growth. It’s obvious that low growth, such as in recessions, causes debt to rise: Tax receipts fall and automatic spending increases.
What is less obvious—and took careful academic investigation—is the evidence that high debt causes lower growth. Those who want to increase government spending at all costs have twisted themselves in knots to avoid the evidence. The contortion usually goes like this: They pick one non-peer-reviewed paper to criticize—usually Carmen Reinhart and Kenneth Rogoff’s 2010 article, “Growth in a Time of Debt.” That article had an embarrassing but minor calculation error and did not attempt to address the question of causality.
But the contortionists have to pretend that academic research is limited to one brief paper. Reinhart and Rogoff, along with Vincent Reinhart, have a more sophisticated 2012 paper, “Debt Overhangs: Past and Present.” International Monetary Fund (IMF) economists Manmohan Kumar and Jaejoon Woo took the question of causality head-on in a 2010 working paper, “Public Debt and Growth,” as did Stephen Cecchetti, M. S. Mohanty, and Fabrizio Zampolli in “The Real Effects of Debt.” New papers by Bob Hall and by Enrique Mendoza and an IMF team combine data and theory to find that recent U.S. spending levels are unsustainable. On the skeptical side, Ugo Panizza and Andrea Presbitero have engaged with the scholarship to offer a cautionary voice, and they deserve credit for their seriousness.
If we combine the obvious point that low growth leads to higher debt with the academic majority view that high debt leads to low growth, we have the classic vicious cycle. That is a reason for serious concern, and it should outweigh politicians’ fear of grappling with an entitlement state that is growing rapidly without constraint.
The CBO’s sobering numbers should motivate Congress to pass serious entitlement reform now—while it can still be done through gradual reforms and not Greek-style austerity.