How National Debt Slows Economic Growth
What’s the Latest Development?
A recently published study conducted by Harvard economist Kenneth Rogoff has found that the more national debt a country has, the greater tendency there is for slow, or negative, economic growth. The study was seized on by fiscally conservative politicians who seek to implement harsh austerity policies at the expense of public services, but while the study did contain some mathematical errors which exaggerated the effects of debt, there is broad consensus that debt, and the subsequent recovery from debt, place serious restraints on the ability of modern economies to grow.
What’s the Big Idea?
Recovering from debt means, of course, saving money rather than spending it. So growth that was fueled by debt accumulation not only halts, but is no longer supported by capital flow. “Accumulating excessive debt usually entails moving some part of domestic aggregate demand forward in time, so the exit from that debt must include more savings and diminished demand. The negative shock adversely impacts the non-tradable sector, which is large (roughly two-thirds of an advanced economy) and wholly dependent on domestic demand. As a result, growth and employment rates fall during the deleveraging period.”
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