UPDATE: Holman Jenkins has a concise and insightful follow-up on this story in the WSJ.
The economics and political communities have recently gone bonkers arguing over details of a study that concluded economic growth declines as national debt reaches 90 percent of annual Gross Domestic Product (GDP). An acknowledged math error in the analysis is being used by Keynesians (borrowers and spenders) to undermine the credibility of the study. John Mauldin wrote a useful summary here.
I think something is missing in this supposed controversy, that being both common sense and reality.
Any analysis about the relationship between national debt and GDP is meaningless in the absence of accountability for the use of the debt and the means of paying it off.
If we borrow money to build a bridge that carries freight for 100 years faster than could be done in the absence of the bridge we have a winner. The carrying cost of the debt is expected to be more than offset over time by the efficiency (GDP growth) offered by the bridge. The same argument is made in support of the 1980’s military buildup credited with causing the Soviet Union to evaporate, leading to a very real peace dividend in the 1990’s as military spending contracted while the US economy grew like a daisy in Spring and the nation had annual budget surpluses from 1998 through 2001..
Borrowing money to expand food stamps to 20 million more people (which has been done) has saddled current and future productive citizens with the burden of principle and interest for the term of the borrowing in exchange for current consumption for those 20 million more people without any possibility of long term improvement in economic efficiency (GDP growth). Money borrowed to pay for the expansion of food stamp recipients comes from the private economy (or is created out of thin air and given a fancy name) but needs to be repaid with the product of productive enterprise in the form of future taxes that will be taken out of the private economy later. Any GDP impact of expanded food stamp consumption now is necessarily reversed upon taxation of productive endeavor to pay off the borrowing later.
This reality leaves us with anticipation of the BANG!, that being the point at which the level of debt and its use to fund current consumption on the backs of a dwindling supply of current and future productive citizens undermines the credibility of the currency to the point where the lenders go away, charge higher rates of interest, or simply don’t exist because they have put themselves in the same position.
What is it again that underlies the assured value of sovereign debt? Nothing much.
Regards, Pete Weldon
americanstance.org