Lacy Hunt – Budget Deficits & Government Debt: A Force For Lower Interest Rates

Slides from the Grant’s Conference – Large Budget Deficits, High Levels of Government Debt – A Force for Lower Interest Rates by Lacy H. Hunt, Ph.D., Chief Economist – Hoisington Investment Management

Gross Federal Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
quarterly

Six Considerations Indicate Federal Finance Will Produce Slower Growth

1. The government expenditure multiplier is already negative.
2. The composition of the spending suggests the multiplier is likely to trend even more negative.
3. The federal debt-to-GDP ratio moved above the deleterious 90% level in 2010 and has stayed above it for more than five years, a time span in which research shows the constriction of economic growth to be particularly severe. It will continue to move substantially further above the 90% threshold as debt suppresses the growth rate.
4. Debt is likely to restrain economic growth in an increasingly nonlinear fashion.
5. The first four problems produce a negative spiral from federal finance to the economy through the allocation of saving, productive investment, productivity growth and eventually to demographics.
6. The policy makers force themselves into a downward spiral when they rely on more debt in order to address poor economic performance. More of the same does not produce better results, only more of the same but worse, a situation we term a policy trap.

Bibliography of Government Expenditure Multiplier Studies

1. Alesina, Alberto, Carlo Favero and Francesco Giavazzi. “The Output Effect of Fiscal Consolidation Plans”, NBER working paper 18336 (2015). Forthcoming in the peer reviewed Journal of International Economics.
2. Barro, Robert J. “The Ricardian Approach to Budget Deficits, The Journal of Economic Perspectives”, Vol. 3 (Spring, 1989). “Macroeconomics A Modern Approach, Thomson/Southwestern” (2008).
3. Blanchard, Olivier, and Roberto Perotti. “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output”. Quarterly Journal of Economics (2002).
4. Dupor, William, and Rodrigo Guerrero. “Does Government Spending Create Jobs, Even During Recessions”. The Regional Economist (2016).
5. Ilzetzki, Ethan, Enrique G. Mendoza and Carlos A. Vegh Gramont. “How Big (Small?) are Fiscal Multipliers?“, IMF working paper (March 2011).
6. Owyang, Michael T., Valerie A. Ramey and Sarah Zubairy. “Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data”. American Economic Review, Volume 103, No. 3 (May 2013). “Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data”. (June 9, 2016).
7. Perotti, Roberto. “Estimating the Effects of Fiscal Policy in OECD Countries”, IGIER working paper 276 (December 2004).

Correlation Coefficients Between Gross Government Debt to GDP and Long Term Government Bond Yields in Four Major Economic Areas 1998-2016
annual
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Government Debt

Total Nonfinancial Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
year ending levels

Business Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
quarterly

Bibliography of Debt Studies Post 2009

1. Arcand, Jean-Louis, Enrico Berkes and Ugo Panizza. “Too Much Finance?” IMF Working Paper, Number 12/161 (June 2012).
2. Buttiglione, Luigi, Philip Lane, Lucrezia Reichlin and Vincent Reinhart. “Deleveraging? What Deleveraging.” Geneva Reports on the World Economy 16, International Center for Monetary and Banking Studies (September 2014).
3. Cecchetti, Stephen G., M S Mohanty and Fabrizio Zampolli. “The real effects of debt.” BIS Working Paper, number 352 (September 2011).
4. Checherita, Cristina and Philipp Rother. “The Impact of High and Growing Government Debt on Economic Growth, An Empirical Investigation for The Euro Area.” European Central Bank Working Paper, Number 1237 (August 2010).
5. Dobbs, Richard, et al. “Debt and (Not Much) Deleveraging.” McKinsey Global Institute (February 2015).
6. Jorda, Oscar, Moritz Schularick and Alan M. Taylor. “When Credit Bites Back: Leverage, Business Cycles, and Crises.” NBER Working Paper, Number 17621 (November 2011).
7. Kumar, Manmohan S. and Jaejoon Woo. “Public Debt and Growth.” IMF Working Paper, Number 10/174 (July 2010).
8. Mian, Atif and Amir Sufi. “Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery.” Federal Reserve Bank of San Francisco Economic Letter (January 2011).

See the full slides below.

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