You might have missed it, but the U.S. reached another milestone this week: Its federal debt hit 104.3% of GDP, the highest since World War II. The largest debt expansion in the history of our nation — indeed, in the history of the world — has taken place under President Obama during the last seven years. Record increases in spending over that time have driven debt relentlessly upward.
Critics would note that nothing bad has happened during the recent debt buildup. Heck, Keynesians argue, all that debt might even have staved off another financial crisis.
But that doesn’t appear to be true.
Repeated studies have shown that rising debt seriously impairs economic growth by siphoning resources and capital away from productive private sector uses. Probably the most famous of the studies was by economists Carmen Reinhart, Vincent Reinhart and Kenneth R. Rogoff, published by the National Bureau of Economic Research.
They looked at 26 advanced economies over a very long time — from 1800 to 2011. What they found was pretty damning: Those countries where the debt-to-GDP ratio exceeded 90% for five years or more suffered substantially lower economic growth. When debt was below 90%, average GDP growth was 3.5%. Above 90%, and GDP growth fell to 2.3% on average. (For the record, an earlier version of the Reinhart, Reinhart and Rogoff study contained math and Excel errors that showed GDP growth at virtually zero when debt rose above 90%; it was corrected in subsequent versions of the study. Still, even the corrected study showed a significant 34% reduction in the rate of GDP growth.)
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