Huge public debt makes Trump's promised growth rates impossible

[Yo_Mama_Been_Loggin]

With the second and third quarter’s growth figures from 2017 coming in above 3 percent, certain political commentators are starting to lament that the U.S. economy is on track to achieve robust and sustained levels of growth above 3 percent for the longer-term.

The president commented on the improving growth figures only a month ago, stating, “We’re going to see economic growth of 4, 5 and maybe even 6 percent, ultimately.”

With the total gross debt set to surpass $21 trillion in the coming months, federal debt held by the public will equate to around 77 percent of GDP by the year's end. This upward trajectory presents some serious challenges to political hopes of sustained growth rates above 3 percent.

Several empirical studies consistently demonstrate that developed economies that reach and surpass debt levels of 90 percent of GDP fail to achieve robust levels of economic growth.

Over the past decade, academic research has highlighted the adverse effects of high public debt on levels of economic growth. In a 2010 study by the European Central Bank, economists Philipp Rother and Cristina Checherita concluded that the government debt-to-GDP ratio has a deleterious impact on long-term growth above 90 percent of GDP.

The study also found that the negative growth effect of high debt starts from debt levels above 70 percent of GDP, although these effects are less significant. The result of high public debt levels are 1) reduced private savings, 2) reduced public investment and 3) lower total factor productivity — all of which lead to lower levels of economic growth.

http://thehill.com/opinion/finance/368520-huge-public-debt-makes-trumps-promised-growth-rates-impossible

Thank you to the so called party of fiscal responsibility.

[Jim__]

1. The Economic Policy Institute calls that 90% number shaky.

The old saying is: if you laid all the economist in the world end-to-end, they still wouldn't reach a conclusion. I don't have an opinion on the claims made in the OP, but the Economic Policy Institute thinks they're questionable - this paper is from 2010.

From the Economic Policy Institute:

There is currently much cautionary talk in policymaking circles regarding the dangers to the economy’s future health posed by crossing a specific threshold in the ratio between government debt and gross domestic product. These fears have been fueled by a recent report by researchers Carmen Reinhart and Kenneth Rogoff. Reinhart and Rogoff have recently engaged in a prodigious research effort aimed at collecting and analyzing economic data and financial crises across dozens of countries and hundreds of years. The most comprehensive repository of this work is their 2009 book This Time is Different: Eight Centuries of Financial Folly; a separate report “Growth in a Time of Debt” (GITD hereafter), based on a subset of their data on national debt and economic growth, has received considerable attention in the media and among policy makers after professor Reinhart testified at the National Commission on Fiscal Responsibility and Reform.1 The claim from GITD that has attracted the most attention is that there is no association between debt and growth at low or moderate levels of debt, but that there exists a well-defined threshold (90%, in their estimation) of government debt relative to gross domestic product (GDP) above which economic growth is hindered. Given that some projections of U.S. national debt over the coming decade show that this 90% threshold may well be exceeded,2 the GITD finding has been seized on by many to push for debt reduction and to argue for rapid, deep cuts in federal spending in order to keep the debt-to-GDP ratio from approaching this supposed benchmark.3 This paper demonstrates several theoretical and empirical flaws of the GITD approach and findings, especially as they relate to the U.S. economy. As a result, policymaking based on the findings of GITD would be deeply unwise, for a number of reasons, including:

...

[Igel]

2. It's a self-immolating article to post.

The projection of US taxes/deficit dates from 3/2017, when all the tax laws and income/expenses that were required by law were from Obama's presidency.

It's a bit worse because of the tax 'reform' and a few other things, but not really much different. That $1.5 trillion isn't much compared to the deficit projected before (R) changes. So "the so-called party of fiscal responsibility" could fail and then say, "but the reason we failed was the Obama-era crippling debt and debt from Obama-era laws and regulations." It's a sucky argument either way. True believers on either side will be convinced, but they were pre-convinced. Sort of like being sold on the sale before they actually left the house to go to the showroom to buy a lot of super-deluxe turnip twaddlers. At least Opus needed to be dazed and confused by a tv ad.

It's an old idea, that, that too much debt diminishes future growth. It's one argument that was included in the original CBO projection for some of the Obama-era spending increases, not just the "stimulus" by any means. The harm to the economy were always projected to be years out, and short-term improvements were the important thing.

For a counter-argument the first reply is appropriate.

The difficulty with both sets of analyses is that there are not controls on the test groups. We look at debt:GDP ratios and assume cet. par. But things really aren't ever ceteris paribus. There are differences. Some are temporal: When do you first get large debt:GDP ratios? Usually when you're country's in the toilet. Ooh ... high debt ratios entail low growth rates. Or maybe it's the other way around? But some countries just out-spend their budgets. Or find a way out of their doldrums. "Cet. par." is a huge fallacy and few chemists, physicists, even experimental biologists would fall for it. "We'll just study the rabbits in this field and assume that, cet. par., we can compare them with toads in this swamp."

Right.