The growth rate of countries with exceptionally high levels of debt—more than 120 percent of the economy—drops even lower, by an average of 2.3 percentage points, which is roughly two-thirds. Applying the crude assumption that GDP would be reduced by 1.2 percentage points, in each year of the assumed 23-year debt overhang period, U. GDP growth would be slashed by more than half to a mere 1 percent. The cumulative effect from the debt overhang would result in a level of GDP lower by nearly one-quarter at the end of the period. gross national debt of .4 trillion, the combined state and federal debt exceeds .5 trillion. Even this measure does not include other federal obligations in the form of Medicaid or veterans’ benefits, for example.
The researchers refer to sustained periods of gross country debt persisting above 90 percent of GDP for five years or more as “public debt overhang episodes.” Identifying 26 such episodes, of which 20 lasted for more than a decade, the research shows that even if such episodes begin with short-lived dramatic events, such as war or a financial crisis, the negative impact from high debt on growth lasts far beyond such events.The authors’ results should serve as a sobering wake-up call for policymakers.The International Monetary Fund, the intergovernmental organization of 188 member states that seeks to ensure the stability of the international monetary system, warned that the U. lacks a “credible strategy” to stabilize its mounting public debt. Such a strategy must begin with putting entitlement spending on a more sustainable long-term path.The sooner policymakers act, the less severe and the more gradual the necessary policy changes can be.High public debt threatens to drive interest rates up, to crowd out private investment, and to raise price inflation. policymakers should learn from Greece and Japan and avoid a fiscal crisis and economic stagnation brought about by public debt overhang.
The implications would be severe and pronounced for all Americans, but most especially for the poor, the elderly, and the middle class. Growing federal debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage the budget and the government would thereby lose its ability to borrow at affordable rates. federal spending in 2013, combined with depressed receipts from a weak economy, is on track to result in a deficit of 0 billion.
The Congressional Budget Office predicts that interest costs on the debt will more than double before the end of the decade, rising from 1.4 percent of GDP in 2013 to 2.9 percent as early as 2020. High levels of U. public debt could push interest rates even higher with severe impacts for the American economy. The government could, through the Federal Reserve, inflate the money supply.
The resulting increase in the rate of price inflation would devalue the principal of the remaining public debt. Economic growth, especially increasing per capita income, depends on the proper functioning of prices to signal and markets to respond, but it also depends fundamentally on increasing the amount and quality of productive capital available to the workforce.
Policymakers should not delay, since the economic consequences, particularly the impact on individuals in or planning retirement, would be pronounced and severe.
Recent research confirms the dangers posed by high levels of government debt.
It is vital in assessing their sustainability to consider their long-term implications.