Perseverating

by Dave Schuler on December 18, 2012

Perseverating on the lacklustre deal that the President and Speaker are inching towards, I see that Nick Gillespie and Veronique de Rugy have pointed out the elephant in the room:

In a paper released this year, economists Carmen M. Reinhart, Vincent R. Reinhart and Kenneth Rogoff said that periods of debt overhang — when accumulated gross debt exceeds 90 percent of a country’s total economic activity for five or more consecutive years — reduce annual economic growth by more than one percentage point for decades.

Over 20 years, the authors write, there can be a “massive cumulative output loss” that reduces gains by 25 percent or more. The U.S. went over the 90 percent threshold after the 2008 financial crisis. At $16.3 trillion, our current gross federal debt represents more than 100 percent of 2012’s total economic activity or gross domestic product.

The challenge therefore is to produce real economic growth in excess of 2% per year without adding to the debt. I remain unconvinced that simply spending the money for additional spending into existence will not produce far worse consequences than slow growth.

When borrowing is counterproductive and just spending is intolerably dangerous, what can you do? My answer, as it has been some time, is to bite the bullet and stop doing things known to be economically inefficient in favor of doing things that at least have a chance of being more efficient. I’ve given examples of that in the past.

We’re not in this fix because of the 2008-2009 recession. We’re in it because spending has exceeded revenues by too large a proportion of GDP over the period of the last forty years and, when a severe recession actually emerged and timely, prudent, counter-cyclical spending might have done some good we a) already had too much debt; b) didn’t produce a timely stimulus; and c) didn’t spend prudently.

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