Notes on National Debt and Long Term Growth

A recent post from Tejvan Pettinger, suggests an opportunity to review a few issues I've highlighted re national debt. His post also served as a response to a reader's question:

What is the impact of persistent national debt on economic growth?

His reader's concern is all the more important, as not only are U.S. debt levels approaching those of the 1940's, but U.S. national debt as a portion of GDP, is now in fifth place among large countries. Granted, while those earlier debt levels were readily brought down, much has changed since then. And I'm hardly alone, in suspecting that national debt reduction has ceased to be a simple matter. Today, far too much economic activity is dominated by sectors which rely on wealth capture, rather than wealth generation.

Specifically, national debt has occasionally proven simpler to manage in the past, whenever tradable sector activity in particular either experienced productivity gains, or tradable sector dynamism was regained after bouts of recession or depression. And today's non tradable sector dominance lacks these aspects of growth potential, because much of it either stabilizes output without growth, or purposely limits output at the outset.

Might the wealth capture of non tradable sectors, also have presented unique problems for growth, early in the twentieth century - especially prior to the Great Depression? (Had I been earlier in life to economic studies, this is one area I'd be pursuing in earnest right now.) Nevertheless: Even though the future dominance of non tradable sector activity was already beginning to take shape in mid twentieth century, not until the seventies, did these sectors begin to pose the current crowding out problems which now affect long term growth. Equally important, is that governments continue to hope for additional growth, so as to have means by which to reduce today's high debt levels.

Pettinger writes:

In summary, there is no obvious link between national (public sector) debt and levels of economic growth.

This observation likely holds for long periods of time in which tradable sector wealth remains in a dominant general equilibrium position, especially as large portions of public debt tend to be oriented towards real economy or supply side outcomes, during a nation's formative periods. However, the recent rise of redistribution and non tradable sector dominance, has not truly had the chance to be reflected in national statistics (so far as I am aware) as a correlation point, other than our most recent sectoral shift episode. In other words, this could be a first representation for the U.S., which illustrates wealth capture in relation to earlier growth gains where extensive wealth serves as point of origin.

He continues:

However, some free-market economists argue that above certain levels very high national debt can curtail economic growth because there is crowding out of the more efficient private sector.

Indeed, this sentiment has inspired countless essays and posts on inefficient governments as contrast with the "efficient" private sector. Unfortunately, private sector inefficiencies are now a major part of the problem re economic dynamism, particularly in terms of addressing long term debt reductions. In all likelihood this accounts for skepticism on the part of some economists, that substantial growth will result from recent Washington tax cuts.

What's at stake in this dilemma? The crowding out of potential growth, which is especially needed as a source of revenue to address high national debt levels, is hardly just a matter of expecting government to "get out of the way". And likewise, we can't expect some participants in the private sector to get out of their own way by changing their stripes.

It is in part for these reasons, that I've suggested time arbitrage as a point of new wealth origin, which could also address the long term crowding out effects of non tradable sector activity. Time arbitrage could function as a private sector wealth creation option, which need not impose the private sector austerity of artificial supply side limits. Even though it's difficult to make progress towards renewed growth in the captured wealth of general equilibrium conditions, it's still possible to generate new wealth at the margins, thereby reducing long term debt.