How the United States landed in a debt 'danger zone'

August 21, 2018 by Jeff Grabmeier, The Ohio State University
Credit: CC0 Public Domain

The interaction of public and private debt in the United States reduced economic growth about 0.43 percentage points per year between 2009 and 2014, a new study suggests.

In addition, growth declined an additional 0.40 percent due solely to high levels of private debt, taking into account .

Overall, the results suggest debt dragged U.S. growth down by at least 0.83 percentage points in this time period.

"The effect that debt is having on our is much larger than we expected. We were surprised," said Mehmet Caner, co-author of the study and professor of economics at The Ohio State University.

The nation's GDP (Gross Domestic Product) grew 4.1 percent in the most recent quarter, but Caner said growth would have been even larger without the current level of debt.

"We should be worried," he said.

Most economists have examined how one type of debt—either public or private—affects economic growth. But this study is one of the first to show that the interaction of the two should be a real concern, Caner said.

"We were able to quantify the effects of this debt interaction and it is kind of scary."

Caner and his colleagues used data from 29 advanced countries (members of the Organisation for Economic Co-operation and Development, or OECD) from 1995 to 2014 to see how debt was related to economic growth. They found that when both public and private debt were relatively low, their interaction could stimulate economic growth.

Even when debt rises, increases in public debt can be offset by decreases in private debt, or vice versa. But if they are both at relatively high levels and increasing at the same time, their interaction can be particularly harmful for growth, results showed.

The study found that the interaction of public and private debt reaches a "danger zone" when it goes above 100 and 137 percent of the nation's GDP for public and private debt respectively.

The researchers calculated that 12 of the 29 countries studied—including the United States—were in this danger zone during the time of the study. The U.S. public-private debt interaction was at 203 percent in the 2009-2014 period.

If debt was reducing U.S. growth by around 1 percentage point a year—as this study suggests—that may explain a large portion of why growth went from 3.3 percent per year before the Great Recession (2007-2009) to about 2.2 percent since the recession.

"Since 2014, both public and private debt ratios in the U.S. have increased, indicating that debt has become an even greater obstacle to growth," Caner said.

Not all kinds of private debt had the same effects, the study found. Results showed that household debt had a much more negative effect than corporate debt.

The reason may be that corporate debt generally goes to more productive uses compared to household spending, such as investments in plants and machinery.

Why is the interaction between private and public debt important for economic growth?

Caner said one reason might be that the government guarantees much private debt, including mortgages and school loans.

"Greater private default often means greater public debt," he said.

These results suggest that Congress should work to control public debt, as many commentators and political groups have suggested, Caner said.

"The other implication is that agencies responsible for regulating private debt should not ignore the interaction between public and private debt, especially mortgage ," he said.

Explore further: Study finds national debt 'tipping point' that slows economic growth

More information: Mehmet Caner et al. Partners in Debt: An Endogenous Nonlinear Analysis of Interaction of Public and Private Debt on Growth, SSRN Electronic Journal (2018). DOI: 10.2139/ssrn.3186077

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6 comments

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cantdrive85
3.4 / 5 (5) Aug 21, 2018
How the United States landed in a debt 'danger zone'

It is an inevitable consequence of a debt based fractional reserve currency system. 1913 was the beginning of the end of what should be a constitutional republic but has devolved into a perverted fascist democracy.
Surveillance_Egg_Unit
3.7 / 5 (6) Aug 22, 2018
Ahhh yes. The OBAMA years - "The interaction of public and private debt in the United States reduced economic growth about 0.43 percentage points per year between 2009 and 2014, a new study suggests.

In addition, growth declined an additional 0.40 percent due solely to high levels of private debt, taking into account public debt.
Overall, the results suggest debt dragged U.S. growth down by at least 0.83 percentage points in this time period."

And now, the MSM fake news have been making an attempt to place the RISING economic growth in the US, as well as the lower unemployment rate amongst Blacks and Hispanics, on the Obama administration, in order to pretend that all that good stuff isn't happening under the Trump presidency. The American mainstream media is rotten to the core. Lies and more lies, especially lies about President Trump.
Disgraceful.
barakn
3.7 / 5 (3) Aug 22, 2018
Ahhh yes. The OBAMA years - "The interaction of public and private debt in the United States reduced economic growth about 0.43 percentage points per year between 2009 and 2014, a new study suggest.
Yes, I'm sure you'd like us to forget that the previous Republican administration of George Bush Jr. was responsible for leaving the dumpster fire economy that Obama had to clean up.
Surveillance_Egg_Unit
5 / 5 (4) Aug 24, 2018
LOL You obviously weren't paying enough attention during the Obama years at what he was doing to proceed to ruin the American economy by encouraging American business to go overseas and hire foreigners who were paid slave wages - all so that they could escape Obama's income tax increases and his oppressive regulations on businesses - large and small.

George W. Bush was a weak-willed "daddy's boy" whose main interest was to succeed his daddy as POTUS and keep the "dynasty" intact. GWBush was no Conservative, unfortunately. He had no understanding of the Business model, whereas, Donald Trump understands business exceedingly well - and abides by his knowledge of it. This is why business in the US is great now, where we now have low unemployment. Obama didn't do that, but instead, the unemployment rate soared ever higher under his watch. It took a Conservative Republican to set the country on the straight path back to greatness.

MAGA!!!
Surveillance_Egg_Unit
5 / 5 (4) Aug 24, 2018
Americans of all economic levels are going back to work. They have gotten pay increases because of President Trump's income tax decreases so that Americans have more spending money available to them. And as a result of that, Americans have more money to spend on goods and services, thereby causing businesses to profit so that a part of their profit goes back into paying their employees a proper living wage. Most of the rest of their profit goes into paying for structural expenses, medical expenses, and paying for business-incurred income taxes, as well as other incidental expenses.

Obama was the biggest apologiser for America's greatness, perhaps inadvertently creating an appearance of groveling toward foreign nations who gave him condescending approval. Merkel, who grew up under Communism, seemed to approve of Obama's groveling and wishy-washy approach to international issues/problems, which gave an appearance that he thought it proper to flood Europe with illegal migrants
Surveillance_Egg_Unit
5 / 5 (4) Aug 24, 2018
And, because of President Trump's lowering of income taxes on both workers AND businesses, large and smaller businesses are able to afford to pay their yearly or quarterly Income Taxes, thereby increasing the coffers of the US Treasury which, in turn, is able to make all of the sundry payments to the various States of the Union to enable them to build and maintain bridges, tunnels, roads, etc.

It is up to the States to allocate payments for infrastructure and wages; but it is ONLY due to the decrease of the US Income Tax on American citizens and businesses that is causing American-owned businesses that went overseas to make the decision to return to the US. It is now economically feasible to return and hire American workers at increased wages.

Barack Obama, the Socialist-Marxist, aimed to raise taxes and to bring the US to her knees because he was ashamed of America and her history. If Hillary had won, Obama would have been the power behind the president.

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