Tea Party protesters seem to reference Ron Paul, Adam Smith, Ayn Rand, and other small-government figureheads as the intellectual founders of their young movement (or at least this is my experience covering tea parties in DC). But maybe they should be citing Kenneth Rogoff of Harvard and Carmen Reinhart of U. Maryland instead. Reinhart and Rogoff have produced a study examining the effects high public debt levels have on the economy. (This study adds to their recent book.) They find that public debt above 90 percent of GDP dampens growth, which would seem to corroborate the tea partiers’ most basic complaints, that being that the government is incurring too much debt.
From their abstract: “…the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more.”
James Picerno highlights this graph from the paper, showing that the US is among the countries that have most increased their debt burden following the financial crisis, because of bailouts, stimulus, etc.:
A recent estimate of U.S. debt-to-GDP ratio is 84%, according to Reinhart and Rogoff–dangerously close to the 90% threshold, as illustrated in the [above] chart taken from the paper.
The bottom line: Bailouts are expensive, perhaps more expensive than generally realized. The worst of the financial crisis and Great Recession may be over, and perhaps that’s due partly to the intervention of central banks and governments around the world. (The business cycle was a factor too.) But let’s not celebrate just yet. The cleanup era has only just begun and it’s not yet clear how much it’s going to cost.
Picerno is actually wrong about the debt level — 84 percent is the change, not the level. According to the CBO, the public debt will be about 65 percent of GDP this year, well below Reinhart and Rogoff’s critical number.
But under the CBO’s projections of the budget going forward (pdf), we will be at 81 percent within a decade. And the CBO’s estimation is based off of the administration’s assumptions about future policies and politics. While those assumptions are plausible, they are definitely rosy compared to a number of alternate scenarios that could play out. The most obvious example would be health care reform costing significantly more than anticipated, which is very likely.
The real bottom line: bailouts are expensive, and the folks rallying in tea parties just may have a better realization of that fact than Congress does.