Can Americans afford slower economic growth and a lower standard of living in the future? That will be the impact of growing government debt on the economy, according to a a policy brief released by the Stanford Institute for Economic Policy Research.
Michael J. Boskin explains:
How does a high debt-GDP ratio slow growth? Higher debt ratios eventually crowd out investment, as holdings of government debt replace capital in private portfolios. The lower tangible capital formation reduces future income. To the extent the reduced capital formation slows the development and dissemination of new technology, this effect will be amplified. Every dollar borrowed requires future interest be paid, whose present discounted value equals the debt. So future taxes must go up to cover the interest unless future spending is cut. The prospect and then reality of higher tax rates, plus increased uncertainty about future fiscal policy, slows growth and also raises the specter of higher inflation eroding the value of the government debt and/or a financial crisis, which might sharply raise interest rates.
So despite what some politicians claim, more government deficit spending and debt actually hurts the economy. What’s needed for economic growth is private investment, not government investment.
What does lower economic growth mean? If the U.S. government continues to recklessly run up the debt, projections have the average family losing as much as 30 percent of their potential income by 2050. That is, families would be one-third poorer because of the burden of government debt.
Politicians like to set up a false choice between fiscal austerity and stimulating the economy, when in reality, the two aren’t mutually exclusive. Debt or prosperity? It’s our choice.