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.
