Expert Commentary

National Bureau of Economic Research: A decade of debt

2011 study for the National Bureau of Economic research on high levels of public debt and the consequences.

Public debt levels in many of the world’s advanced economies, including the United States, have risen to levels not seen since World War II. History suggests that reversing this trend will not be painless and will require a number of years to accomplish. Indeed, the examples of debt crisis and bailouts in countries such as Greece, Ireland and Portugal may portend a difficult future for other countries.

A 2011 study by Harvard University and the Peterson Institute for International Economics for the National Bureau of Economic Research, “A Decade of Debt,” explores historic patterns of debt accumulation and looks at prospects for the decade between the financial crisis of 2008 and 2017. The authors’ historical observations come from new data about 44 countries over the past two centuries.

The study’s findings include:

  • In the post-World War II period, the median public debt-to-GDP ratio has been 36.4%.
  • In countries where there have been financial crises — including the United States and the United Kingdom — debt levels are currently averaging 134%, beyond the 86% average that marked previous crises in modern economic history.
  • For economies where the debt-to-GDP ratio exceeds 90%, median growth rates have historically fallen by 1%; for emerging economies where the debt-to-GDP exceeds just 60%, annual growth has fallen by 2%.
  • Total public debt in the United States in the first quarter of 2010 was 117% of GDP; it was last at such levels in 1945, when the ratio was 119%.
  • There is substantial risk that the current high debt levels will lead to “financial repression,” resulting in more directed lending to government from pension funds, caps on interest rates, and stricter regulation of cross-border capital flows.

The study’s authors state that as countries “hit debt intolerance ceilings, market interest rates can begin to rise quite suddenly, forcing painful adjustment.” As for claims that the U.S. economy may prove an exception to historic rules, they find “no evidence” to suggest that “the consequences of higher debt levels for growth will be different for the U.S than for other advanced economies.”

Tags: Congress, economy, financial crisis, campaign issue