Monday, June 18, 2012

Study: Long-term deficits are linked to 24 percent lower growth


I haven't read the article referred to. But I've mentioned this in the past. One of the big unspoken costs the deficit imposes is a lower growth rate. It's not just that we pass on a debt burden to our children and grand children. It's also the economy grows at a slower rate making it even more difficult for them to pay off that debt.

If the young knew about this inter-generational wealth transfer that was taking place, and how we were placing major impediments in their path, I doubt they'd be happy. 


Study: Long-term deficits are linked to 24 percent lower growth

What's the real harm of a massive government deficit? Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff find that high public debt is associated with a significantly lower level of GDP in the long run.

In a new paper for the National Bureau of Economic Research, the researchers examined the historical incidence of high government debt levels in advanced economies since 1800, examining 26 different "debt overhang episodes" when public debt levels were above 90 percent for at least five years.

The debt episodes included everything from Netherlands' Napoleonic War debts and the Japan banking crisis of the 1990s to Greece's current fiscal crisis. On average, the researchers found that growth during these periods of high debt were 1.2 percent lower on average, consistent with Reinhart and Rogoff's findings in 2010. What they also found, however, was these episodes of high debt and lower growth were quite lengthy, averaging 23 years. And the accompanying long-term drag on GDP was substantial. "By the end of the median episode, the level of output is nearly a quarter below that predicted by the trend in lower-debt periods," they explain.

Such findings strengthen the case for tackling the long-term deficit in the United States, where the debt-to-growth ratio shot past 101 percent in February. But the authors also warn that their paper shouldn't be interpreted as a manifesto "for rapid public debt deleveraging in an environment of extremely weak growth and high unemployment."

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