Excessive debt threatens the economic future of the United States. Economists are increasingly sounding alarm bells that the escalating federal debt is reaching unsustainable levels.
A recent paper by three economists at the Bank of International Settlements bluntly notes, “[A]t low levels, debt is good. It is a source of economic growth and stability. But at high levels, private and government debt are bad, increasing volatility and retarding growth.”
Their study examined 18 countries in the Organization of Economic Cooperation and Development from 1980-2010. They found that government debt undermines economic growth when the debt reaches 85 percent of gross domestic product.
The economists Carmen Reinhart and Kenneth Rogoff conducted a study of 44 countries spanning 200 years, and found that central government debt exceeding 90 percent of GDP in advanced economies stunted growth. They noted that war debts are less problematic for future growth than large peacetime debts — since government spending on wars ends, funneling manpower and resources back into the civilian economy.
A peace-time debt explosion, however, often reflects unstable political economy dynamics. Countries seldom grow their way out of these debts, and market interest rates can rise quite suddenly.
The total debt of the U.S. government stands at 98 percent of the most recently reported level of GDP. We are well into the danger zone. The potential consequences include a downward cycle of decelerating growth; debt-induced tax and interest rate increases, and vulnerability to external shocks.
Because the size of the economy affects creditors’ perception of a government’s ability to repay its debts, prospects for future economic growth play an important role in shaping that perception.
To reduce the size of debt relative to the economy, nominal GDP must grow at a faster rate than debt. In the two years that Democrats controlled the White House, the House and the Senate, total federal debt increased at an annual rate of 14.8 percent, while nominal GDP increased at an annual rate of 2.4 percent.
Consequently, the total federal debt increased from 76 percent of GDP at the end of 2008 to 95 percent of GDP at the end of 2010.
Since Republicans took control of the House, even with opposition from President Barack Obama and the Democratic-controlled Senate, the annual rate of debt increase has slowed to 7.4 percent. That rate is still far too big — but it represents an important change in direction.
Unfortunately, the new stimulus package proposed by Obama under the label of a “jobs bill” will not get our economy moving again or spur private sector job creation.
As the economists Michael Boskin and John Taylor recently pointed out, Obama’s proposal is another exercise in wealth redistribution, accomplished through temporary transfers and tax credits to people and grants to state and local governments. These temporary measures would be “paid for” with permanent tax increases that would sock small businesses, our major job creators.
To jumpstart the economy and start the private sector’s job creation engine, we must get instead Washington out of the way.
We need to remove the uncertainty created by the president’s dedication to expanding Washington’s control over the economy. We need to end the anti-employer attitude stifling the private sector. And we need to pass reforms that shrink the size of the federal government relative to the overall economy.
From 1981 to 2001, we reduced the size of the federal government from roughly 22 percent of GDP to 18 percent. Over those two decades, private payroll employment increased by a whopping 50 percent — or 37 million private sector jobs. At the same time, federal payrolls declined by 7 percent.
In recent years, the federal government has grown as large as 25 percent of GDP. The result is 2.5 million fewer private sector jobs — and 69,000 more federal employees.
Today, we have a choice to put the federal government on a sustainable fiscal course. If we fail to act, we are approaching the time that we may find ourselves in the same situation as Greece — being forced to pay interest rates of more than 20 percent to borrow money for 10 years.
We cannot continue down the path of hoping big-government, Washington-knows-best policies, which have failed repeatedly, will now suddenly work.
It’s time to let America be America again.
Rep. Kevin Brady (R-Texas) is the vice chairman of the Joint Economic Committee. Sen. Jim DeMint (R-S.C.) is the senior Republican senator on the Joint Economic Committee. The committee is holding a hearing “What is the Real Debt Ceiling” on Tuesday.