Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. Above 90 percent, median growth rates fall one percent, and average growth falls considerably more. In addition, for emerging markets, there appears to be a more stringent threshold for total external debt/GDP; when external debt reaches 60 percent of GDP, annual growth declines by about two percent and for higher levels, growth rates are roughly cut in half. Seldom do countries simply 'grow' their way out of deep debt burdens.Economist Paul Krugman disputed the existence of a solid debt threshold or danger level, arguing that low growth causes high debt rather than the other way around.[90] He also points out that in Europe, Japan, and the US this has been the case. In the US the only period of debt over 90% of GDP was after World War II when "when real GDP was falling, not because of debt problems, but because wartime mobilization was winding down and Rosie the Riveter was becoming a suburban housewife."[91] Fed Chair Ben Bernanke stated in April 2010:[92]
Neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. But given the significant costs and risks associated with a rapidly rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time.There is also a second debate regarding whether debt held by the public (a lower amount) or gross debt (a larger amount) is the appropriate measure to use in evaluating the debt burden, measured as a percent of GDP. Krugman argued in May 2010 that the debt held by the public is the right measure to use, while Reinhart has testified to the President's Fiscal Reform Commission that gross debt is the right figure. Certain members of the Commission are focusing on gross debt.[90] The Center on Budget and Policy Priorities (CBPP) cited research by several economists supporting the use of the lower debt held by the public figure as a more accurate measure of the debt burden, disagreeing with these Commission members.[93]
This second debate relates to the economic nature of the intragovernmental debt that represents the difference between the two debt figures. As of April 30, 2010 the public debt was $8.4 trillion (59% GDP) and the gross debt was $12.9 trillion (90% of GDP), using a $14.3 trillion GDP estimate. The difference is the $4.5 trillion intra-governmental debt, mainly represented by the Social Security Trust Fund.[94]
For example, the CBPP argues:[93]
Debt held by the public is important because it reflects the extent to which the government goes into private credit markets to borrow. Such borrowing draws on private national saving and international saving, and therefore competes with investment in the nongovernmental sector (for factories and equipment, research and development, housing, and so forth). Large increases in such borrowing can also push up interest rates and increase the amount of future interest payments the federal government must make to lenders outside of the United States, which reduces Americans’ income. By contrast, intragovernmental debt (the other component of the gross debt) has no such effects because it is simply money the federal government owes (and pays interest on) to itself.Current projections indicate the lower debt held by the public figure will hit 90% of GDP by 2020.[95]
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