GDP: What’s Debt Got To Do With It?

09.29.2010 |

Is there a magic threshold beyond which national debt has a direct relationship to slowed GDP growth? Yup.

Have you had the sneaking suspicion that a nation’s debt can be a dead weight on the nation’s gross domestic product (GDP)? You’re right! New economic research can tell you exactly how much debt a country can handle before that debt begins to hurt its economy.

Good news for the U.S. and other developed nations – we can handle a public debt equal to 77 percent of GDP. Bad news for China and all the other developing nations out there – you can only handle a debt load of 64 percent before things head south in a hurry.

What I found particularly interesting was the linear nature of the relationship between national debt and GDP. This isn’t tricky statistical modeling – there is an obvious linear relationship showing that the more debt a nation has (over the 77 percent tipping point), the slower its GDP growth.

A paper describing the research will be published for the first time as part of a volume collected by the World Bank, titled Sovereign Debt and the Financial Crisis, which will be distributed at the IMF/World Bank meeting in D.C. in October. It should prompt some interesting discussion, if anyone reads it.

The researchers, from NC State and the World Bank, reached their conclusions by analyzing the debt of 100 countries from 1980-2008. During that time frame, the average U.S. debt was 61 percent of GDP, so we’re not at the tipping point yet. Hopefully we won’t go over the edge.

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