Government debt

Where Governments Should Spend More

As a result of the pandemic, U.S. general government debt (federal, state, and local obligations combined) has surged above 130 percent of GDP, more than double what it was in 2007. And, recent U.S. experience is far from unique. Looking at the G20, average public debt rose from 52% of GDP in 2007 to 74% in 2019 and is projected to reach 91% next year.

Unsurprisingly, as government debt increases, the debate over public spending heats up. Are these high debt ratios sustainable? Should we be cutting spending and raising taxes to reduce what will otherwise be a large financial burden on future generations?

In this post, we emphasize that not all government spending is created equal. Investment in physical infrastructure, as well as in education and health—especially for children—can boost future GDP. Moreover, delaying inevitable outlays can boost long-run costs. As a result, a failure to make productive, self-financing investments due to concerns about the debt would be not only tragic, but counterproductive….

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GDP-linked Bonds: A Primer

Gross government debt in advanced economies has surpassed 105% of GDP, up from less than 75% a decade ago. Some countries with especially large debts—including Greece (177%), Italy (133%) and Portugal (129%)—are viewed not only as a risk to the countries themselves, but to others as well. As a result, policymakers and economists have been looking for ways to make it easier to manage these heavier debt burdens.

One prominent suggestion is that countries should issue GDP-linked bonds that tie the size of debt payments to their economy's well-being. We find this idea attractive, and see the expanding discussion of the viability of GDP-linked bonds both warranted and useful (see here and here). However, the practical issues associated with GDP data revision remain a formidable obstacle to the broad issuance and acceptance of these instruments....

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The euro area's debt hangover

The ongoing difficulties in Greece – combined with the ECB’s dramatic actions to ward off deflation – are distracting attention from what may be the euro area’s biggest and most pervasive problem: debt.

You wouldn’t know it from the record low level of government bond yields, but much of Europe lives under a severe debt burden. Nonfinancial corporate debt exceeds 100 percent of GDP in Belgium, Finland, France, Ireland, Luxembourg, Netherlands, Portugal, and Spain. And, gross government debt (as measured by Eurostat) is close to or exceeds this threshold in Belgium, France, Greece, Ireland, Italy, Portugal and Spain...

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