Crushed by debt


A demonstrator holds placards to protest U.S. debt in front of the Capitol in Washington July 18, 2011.

Article Highlights

  • Americans are accustomed to experiencing solid and steady economic growth.

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  • Surging federal debt may soon produce a generation of Americans who have never experienced even modest economic growth.

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  • Even if debt is stabilized in 2016, we can still expect much lower growth over the next few decades.

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This article appears in the November 12, 2012 issue of National Review.

Americans are accustomed to experiencing solid and steady economic growth. Recessions have been the exception rather than the rule, and growth has been remarkably stable. Even our bad decades have been pretty good. GDP grew at an average annual rate of 3.26 percent in the 1970s, 3.05 percent in the 1980s, and 3.2 percent in the 1990s. Growth was only a smidgen less than that even in the 2000s, at least until the calamitous events of 2008.

President Obama’s fiscal policies, which have pushed our federal debt to World War II levels and are on track to add trillions more debt over the next decade, promise to deliver an economic future that is different from anything in our experience. Exactly how different is made clear by an alarming new study from Stanford University economist Michael Boskin.

Higher national debt restrains growth through three main channels. Interest payments siphon revenues away from productive activities, government borrowing crowds out private investment, and uncertainty dampens investment. While economists have known about these channels for some time, Boskin is the first to carefully quantify the negative effects of the current debt explosion on our growth prospects.

To do this, he surveys the economic literature and identifies the consensus estimates of how high the negative effects of debt are on economic growth. He highlights two studies that find strong negative effects. According to one, which was published by economists at the IMF, every 10 percent increase in the ratio of the national debt to GDP reduces future GDP growth by 0.17 percent. The other, a paper co-authored by economists Vincent and Carmen Reinhart and Kenneth Rogoff, finds that the economy loses about 1.2 percentage points of annual growth once debt levels climb above 90 percent. Boskin then asks the simple question: If the U.S. experience is similar to that of other countries with exploding debt, how bad does the growth picture get?

Editor's note: A previous version of this chart showed labels switched for two of the lines. The pink line was misidentified as representing a continuation of President Obama’s policies, while the red was incorrectly labeled as a reversal of his policies. We regret any confusion this may have caused.

The accompanying chart illustrates Boskin’s key result. The top line is a baseline wherein the U.S. posts annual GDP growth of 2.25 percent, slightly lower than what the administration’s Office of Management and Budget has projected. The dark red line is the growth path we can expect if President Obama’s policies are all enacted and government debt is allowed to grow as projected by the OMB. The pink line is the growth path we can expect if government debt is stabilized in 2016.

The results are stunning. The red line, which describes the future path of the economy if President Obama’s policies are enacted, is fully 30 percent below the baseline by 2050. What is even more disturbing is that Boskin finds economic growth along that path essentially stopping in about 2040. Even if heroic measures are taken and the debt is stabilized in 2016, we can still expect much lower growth over the next few decades as the toll for our heavy spending binge.

The steady march to prosperity we have experienced over the years is no sure thing. Indeed, the surging federal debt may soon produce a generation of Americans who have never experienced even modest economic growth.

Kevin Hassett is the director of economic policy studies at AEI


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About the Author


Kevin A.
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.

    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

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