Economic geniuses Carmen Reinhart and Kenneth Rogoff have authored another paper on the pile up of public debt and its effect on economic growth–based on 200 years of data. (Note to Congress: It’s so refreshing to see actual evidence for economic policy recommendations!) The Wall Street Journal has a synopsis of their argument here.
One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.
The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections.
Unsurprisingly, economies engaged in paying off the cost of massive government bureaucracies and unrestrained public spending have a hard time being productive. It’s just difficult enough paying off the debt. With the U.S. projected to hit the 90% threshold shortly, it’s time to diversify your portfolio.
