Crunching Reinhart-Rogoff: High Debt Doesn't Slow Growth

Very interesting (by Miles Kimball and Yichuan Wang May 29, 2013):

High debt levels in the late 1940s and the 1950s were followed five to 10 years later with relatively high growth.  Low debt levels in the 1960s and 1970s were followed five to 10 years later by relatively low growth. High debt levels in the 1980s and 1990s were followed five to 10 years later by relatively high growth. …

We don’t want anyone to take away the message that high levels of national debt are a matter of no concern. As discussed in “Why Austerity Budgets Won’t Save Your Economy,” the big problem with debt is that the only ways to avoid paying it back or paying interest on it forever are national bankruptcy or hyper-inflation. …

… There are three main ways to use debt to increase growth enough to avoid having to raise taxes or cut spending later:

1. Spending on national investments that have a very high return, such as in scientific research, fixing roads or bridges that have been sorely neglected.

2. Using government support to catalyze private borrowing by firms and households, such as government support for student loans, and temporary investment tax credits or Federal Lines of Credit to households used as a stimulus measure.

3. Issuing debt to create a sovereign wealth fund—that is, putting the money into the corporate stock and bond markets instead of spending it, as discussed in “Why the US needs its own sovereign wealth fund.” For anyone who thinks government debt is important as a form of collateral for private firms (see “How a US Sovereign Wealth Fund Can Alleviate a Scarcity of Safe Assets”), this is the way to get those benefits of debt, while earning more interest and dividends for tax payers than the extra debt costs. And a sovereign wealth fund (like breaking through the zero lower bound with electronic money) makes the tilt of governments toward short-term financing caused by current quantitative easing policies unnecessary.

via After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth – Quartz


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