How much does having too high a national debt hurt a country’s ability to grow its economy?
Thanks to recent research published by the National Bureau of Economic Research, using historical data going back to 1800, we can now answer the question. Once a country’s national debt exceeds 90% of its GDP, and it stays above that level for at least five years, it appears to shave 1.2% off the country’s economic growth rate, every year.
That may not seem like much, but piled up year after year, the change can be substantial. The chart below, excerpted from the working paper, shows how different the results can be for up to as long as 23 years a nation’s debt grows too large:
Compared to countries that maintained their debt-to-GDP ratios below 90%, countries that racked up higher levels of debt had economies that were 24% smaller at the end of 23 years.
As of 2011, the ratio of the U.S. total public debt outstanding to the nation’s GDP was 98%. That’s up from 93.4% in 2010 and 84.4% in 2009.
How well would you say the U.S. economy is growing these days?
Carmen M. Reinhart, Carmen M., Reinhart, Vincent R. and Rogoff, Kenneth S. Debt Overhangs: Past and Present. NBER Working Paper Series. Working Paper 18015. April 2012.