Yes, we should still care about federal debt

Peterson Foundation

Peterson Foundation

From “Debt and Growth: Is There a Magic Threshold?” by Andrea Pescatori, Damiano Sandri, and John Simon and distributed by the IMF:

Is there a particular threshold in the level government debt above which the medium-term growth prospects are dramatically compromised? The answer to this question is of critical importance given the historically high level of public debt in most advanced economies. Yet there is currently no agreement on the answer and it is the subject of heated academic and political debate. One camp has argued that high levels of debt are associated with particularly large negative effects on growth. For example, an influential series of papers by Reinhart and Rogoff (2010, 2012) argues that there is a threshold effect whereby debt above 90 percent of GDP is associated with dramatically worse growth outcomes.

An opposing perspective is advanced by those who dispute the notion that there is a clear debt threshold above which debt sharply reduces growth and raise endogeneity concerns whereby weak growth is the cause of particularly high levels of debt. Thus, according to this view, the priority should be increasing growth rather than reducing debt and, consequently, that much less short-term fiscal austerity is appropriate.

This paper makes a contribution to the debate by presenting new empirical evidence based on a different way of analyzing the data and a sizeable dataset. Our methodology is based on the analysis of the relation between debt and growth over longer periods of time that has the potential to attenuate the concerns of reverse causality from growth to debt.

Our results do not identify any clear debt threshold above which medium-term growth prospects are dramatically compromised. On the contrary, the association between debt and medium-term growth becomes rather weak at high levels of debt, especially when controlling for the average growth performance of country peers. We also find evidence that the debt trajectory can be just as important, and possibly more important, than the level of debt in understanding future growth prospects. Indeed, countries with high but declining levels of debt have historically grown just as fast as their peers. We also find, however, that high levels of debt are weakly associated with higher output volatility. This suggests that high levels of debt may still be associated with market pressure or fiscal and monetary policy actions that, even if they do not have particularly large negative effects on medium-term growth, destabilize it.

This is an interesting, ongoing theoretical argument that should really have no impact on whether we should reform entitlements ASAP. We should, of course, so that (a) tax dollars are used more efficiently, (b) the programs provides better services to those who need them the most, and (c) “market pressure” situation where changes will need to be blunt are avoided.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

62 thoughts on “Yes, we should still care about federal debt

  1. Here is a recent quote from the WH about an issue that liberals rank of very high importance:
    ‘The president “is going to continue to make the case that climate change is already hurting Americans around the country,” said White House spokesman Matt Lehrich. “It will only get worse for our children and grandchildren if we leave it for future generations to deal with.” ‘

    How about substituting the words “federal debt” for “climate change”? It is intriguing that BO supporters are so concerned with the impact of climate change (about which there can be said to be reasonably some amount of serious doubt among scientists) on future generations, but are apparently not at all concerned about the impact of the federal debt on those future generations. How can one explain this inconsistency?

    It must be a case of “follow the money.” Climate concern carries with it large amounts of federal grant money and subsidies for vested interests. But there is no money or influence to be reaped from expressing concern about debt burdens. In fact, incurring debt that is then used to support entitlement programs and consumption is the recipe for winning votes. Actually dealing with unsustainable entitlement programs, which would help dealing with the federal debt, would probably risk losing some votes.

    • Well, yes, let’s follow the money. When the govt gave away free leases in the Gulf to Big Oil in 1996 it p*ssed away $53 billion in future royalties of which about $5 billion has gone missing already.
      The Solyndra guarantee at $535 million was a tenth as much to this point and promises to be in the end 1 percent of Big Oil’s payday in a single piece of legislation. So if you go apoplectic about Solyndra but free Gulf leases are fine and dandy by you, how do you explain this inconsistency?

      • Apologies, Jane, I’ll field this one:

        Obama “green” multi-billion dollar fail:

        1. Evergreen Solar ($25 million)*
        2. SpectraWatt ($500,000)*
        3. Solyndra ($535 million)*
        4. Beacon Power ($43 million)*
        5. Nevada Geothermal ($98.5 million)
        6. SunPower ($1.2 billion)
        7. First Solar ($1.46 billion)
        8. Babcock and Brown ($178 million)
        9. EnerDel’s subsidiary Ener1 ($118.5 million)*
        10. Amonix ($5.9 million)
        11. Fisker Automotive ($529 million)
        12. Abound Solar ($400 million)*
        13. A123 Systems ($279 million)*
        14. Willard and Kelsey Solar Group ($700,981)*
        15. Johnson Controls ($299 million)
        16. Brightsource ($1.6 billion)
        17. ECOtality ($126.2 million)
        18. Raser Technologies ($33 million)*
        19. Energy Conversion Devices ($13.3 million)*
        20. Mountain Plaza, Inc. ($2 million)*
        21. Olsen’s Crop Service and Olsen’s Mills Acquisition Company ($10 million)*
        22. Range Fuels ($80 million)*
        23. Thompson River Power ($6.5 million)*
        24. Stirling Energy Systems ($7 million)*
        25. Azure Dynamics ($5.4 million)*
        26. GreenVolts ($500,000)
        27. Vestas ($50 million)
        28. LG Chem’s subsidiary Compact Power ($151 million)
        29. Nordic Windpower ($16 million)*
        30. Navistar ($39 million)
        31. Satcon ($3 million)*
        32. Konarka Technologies Inc. ($20 million)*
        33. Mascoma Corp. ($100 million)

        And Turd, you’re worried about tax cuts?

        • Mesa–don’t forget the renewable greenie-weenie energy program that dwarfs all others: Ethanol or pink moonshine, hammer & sickle juice.
          900,000 barrels a day by federal diktat.

          • Are you suggesting that the leftist EPA ethanol mandate somehow costs more than the bizarre CO2 (which is not a pollutant) pollution mandate?

          • Bush said, “I’m an ethanol man.” He even tried to mandate cellulose ethanol. Like defense spending, mostly a sop to lardsnufflers…and no, Obama is not better…

          • Ethanol is one of the dumbest ideas in the history of this country, irrespective of origin.

            Turd is another.

          • Nope answering your question of which statute gave ADM the ability to turn corn into money. Here is another interesting legislative fact from DOE:

            “The Loan Programs consist of three separate programs managed by two offices, the Loan Guarantee Program Office (LGP) and the Advanced Technology Vehicles Manufacturing Loan Program Office. LPO originates, guarantees, and monitors loans to support clean energy projects through these programs. The programs are:

            Section 1703: Under Section 1703 of Title XVII, [Energy Policy Act of 2005] DOE LGP is authorized to guarantee loans for projects that employ new or significantly improved energy technologies and avoid, reduce or sequester air pollutants or greenhouse gases.
            Section 1705: Under Section 1705 of Title XVII, added by the American Reinvestment and Recovery Act (ARRA) [2009], DOE LGP is authorized to guarantee loans for certain clean energy projects that commenced construction on or before September 30, 2011. The Section 1705 program expired, pursuant to statute, on September 30, 2011 and will actively monitor projects that previously received loan guarantees under the 1705 program. LPO will no longer issue new loan guarantees under the 1705 program.
            Advanced Technology Vehicles Manufacturing (ATVM): Under Section 136 of the Energy Independence and Security Act of 2007, DOE is authorized to provide direct loans to finance advanced vehicle technologies.”

            Three laws, one by O, two be Dubya. Two still operating, neither of them O’s.

            Too bad the teabaggers are Koch brothers’ sock puppets. There is plenty of crony capitalism out there that sufficient numbers of Ds and Rs would jump on in a minute.

          • Incorrect.

            The EPA easily wins the most moronic and dangerous leftist agency award.

            Why do you fellate them so much, Turd?

          • Just sayin Dubya and a Republican congress added taxpayers as guarantors of DOE alt energy loans in 2005 cuz dependence on foreign oil had ginned up a Mesa serenade. (The sky is falling! The sky is falling!) How is that working out?
            As for the Koch brothers I believe the point of a sock puppet is to conceal the identity of the hand. Or to distract rubes like Mesa like the other hand does its thing.

          • And as was stated before, at least some of that activity resulted in tax revenue accrual to government.

            Nothing compares to the destruction of the Obama green energy debacles, most of which were direct taxpayer giveaways to political supporters. It continues to weigh on the already struggling economy.

            Fools like Turd have to distract and obfuscate by blaming Bush or the eeeeeevil Koch Brothers ™ to avoid the embarrassment and failures of their policies.

          • Amazing consistency, Mesa. On the subject of alt energy loans guarantees you also know diddly and squat. Under Sec 1703. passed by Dubya and a here-take-an=extra-billion Congress run by Rs, DOE backed loans for NUCLEAR POWER PLANTS (!!!??) Here is the CBO on the prospect of those guarantees coming into play.
            The two loan programs have several things in common. Regular ole power utilities got most of the money. NRG claimed about a third of O’s money for generating-plant sized solar installations which at least will generate power, if not buckets of tax revenues. (NRG paid no taxes in 2012.)
            The second is that the only green that matters in utility executive suites is money. “Why, yes, clearly there is a pressing problem of national security that can only be fixed by Uncle Sugar laying some green on us.” Only it wasn’t a problem of national security, eh?
            Now you tell me. Is it possible for sock puppets like Mesa to get at least one clue?

          • Amazing stupidity Turd.

            On the subject of productive and semi-productive economic activity, you don’t know jack shit.

            All of us are highly impressed at your ability to cite arcane instances of ACTIONS WHICH RESULTED IN ECONOMIC ACTIVITY, specifically power production, but we’re more than amused at your total inability to understand that 1) we really don’t give 2 shits about who does these things, and 2) the Obama green energy debacle is far, far larger than your insipid example.

            Keep trying; maybe you can find a string of 15 – 20 failures, where power plants were destroyed along with economic value.

            PS, you can take your CBO projections, and shove them back up your ass, too.

          • “we really don’t give 2 shits about who does these things”

            Hahahahaha. Teabagger ignorance is exceeded only by its hypocrisy.

      • The inconsistency, asshole, is that my taxpayer money was given away with zero return, at my expense.

        The oil leases you mention produced taxable revenue.

        Now please, shut the fuck up, and go directly to hell, do not pass go, do not collect $200, you financial dumfuck.

      • When the govt gave away free leases in the Gulf to Big Oil in 1996“…

        Well todd govt was giving something away that didn’t belong to them in the first place…

        The federal government was extorting even more money from the private sector over and above taxes…

        • Ummm, you and I as citizens own the mineral rights under public lands, including the Gulf. By your logic, you don’t own your car. Let’s meet up so you can hand over your keys.

          • everything which you don’t own directly belongs to government“…

            Well if that’s the case todd and his fellow travelers seem to have a feudal outlook on life…

            Actually what it sounds like is more of that negative liberties song & dance that some alledged constitutional scholar was moaning about not being in the constitution, mesa

          • Purchase: Louisiana Territory. New owners, We the People, U. States of America; Agent: Thos Jefferson.

            So I gather you don’t believe in property rights.

          • Purchase: Louisiana Territory. New owners, We the People, U. States of America; Agent: Thos Jefferson“…

            Ha! Ha! Ha! Ha!

            OK todd which president purchased the Gulf of Mexico and who did that president buy it from?

          • Didn’t have to buy it. Came with the deal. Sovereignty to 12 miles offshore. Economic control to 200 miles or the continental shelf. World standard. Norway’s sovereign fund, at $818B amounts to $150k/Norwegian mann, kvinne og barn.

      • Notice Turd compares money Obama already pissed away on his green jobs cronies to an estimate over the next 25 yrs. Apples and oranges. From his link: “According to the Government Accountability Office it’ll come to $53 billion over the next 25 years. “

        How much you suppose the Democrats will stick the taxpayers on behalf of their green rent seekers in the next quarter century?

        In order to promote the extraction of certain kinds of natural resources, the Interior Secretary may exercise powers under the Outer Continental Shelf Lands Act and the Deep Water Royalty Relief Act of 1995 to grant royalty relief to drillers. In the mid 1990s, when the latter law was passed, fossil fuel prices were low, so certain types of drilling projects seemed uneconomical without government assistance. The subsidies took the form of relieving companies from having to pay federal royalties on the resources they extracted.

        • Glad to see you doing some research. Now put some numbers to “money O p*ssed away.” Could it be less than Big Oil has ripped off in the Gulf so far? (Why, yes, it is. at ~ $1 bill heading to $2.7 billion according to an independent study.)

  2. Still?

    The problem is the demographic squeeze, which is bankrupting the country, courtesy of massive euro-style welfare programs unforeseen as a problem by the leftists who constructed them.

    Our current configuration has 2 or 3 years left.

    Then the problems really start.

    You think the debt ceiling is a problem?


    Just wait…

  3. Here’s the problem:

    Both SSDI and OASDI trust funds will exhaust themselves by 2020.

    That’s 5 years. No one is talking about this. Anyone telling you otherwise is lying and/or fucking ignorant, like Larry G.

    What we have now is political dysfunction preventing any temporary remedy, thanks to Turd and his family “gaming the system.”

    When that happens, automatic cuts will take place, similar to the sequester, and President Hitlary and the Democratic Party will dictate where your childrens savings will be used:

    This is not a drill.

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