Excessive debt threatens the economic future of the United States. Economists are increasingly sounding alarm bells that the escalating federal debt is reaching unsustainable levels.

A recent paper by three economists at the Bank of International Settlements bluntly notes, “[A]t low levels, debt is good. It is a source of economic growth and stability. But at high levels, private and government debt are bad, increasing volatility and retarding growth.”

Their study examined 18 countries in the Organization of Economic Cooperation and Development from 1980-2010. They found that government debt undermines economic growth when the debt reaches 85 percent of gross domestic product.

The economists Carmen Reinhart and Kenneth Rogoff conducted a study of 44 countries spanning 200 years, and found that central government debt exceeding 90 percent of GDP in advanced economies stunted growth. They noted that war debts are less problematic for future growth than large peacetime debts — since government spending on wars ends, funneling manpower and resources back into the civilian economy.

A peace-time debt explosion, however, often reflects unstable political economy dynamics. Countries seldom grow their way out of these debts, and market interest rates can rise quite suddenly.

 

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