The President’s Budget: Bad for Economic Growth and Bad for Jobs

In 2010, economists Ken Rogoff and Carmen Reinhart completed a widely cited study that looked at the historical relationship between public debt and GDP growth and inflation in a variety of advanced and developing countries. The study used data from 44 countries and spanned roughly 200 years. It found conclusive empirical evidence that when gross public debt exceeds 90 percent of GDP in these countries, economic growth declines materially. Among the 20 advanced countries in the study, for instance, average annual GDP growth came in at 3 to 4 percent when debt was relatively moderate or low (i.e. under 60 percent of GDP). But annual growth dipped to just 1.6 percent when debt was high (i.e. above 90 percent of GDP).[1] This academic study focused on gross central government debt, which is most akin to the concept of total public debt in the U.S.[2] 

The implication is that the U.S. economy may be growing at half the rate it should be if not for the burden of excessive government debt. This slower growth translates into higher unemployment and about 620,000 fewer jobs this year.

At a Senate Budget Committee hearing on February 17, 2011, then-Treasury Secretary Tim Geithner responded to a related study by Reinhart and Rogoff by noting that “It’s an excellent study. And you could say in some ways what you summarize from it, understates the risks, because it’s not just that governments or countries that live with very high debt-to-GDP ratios are consigned to weaker growth. They’re consigned to the damage that comes from periodic financial crises as well.” But instead of taking steps to reduce the excessive burden of debt, the President’s budget, even if fully implemented, never reduces gross federal debt below the important 90 percent threshold.

[1] Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” January 2010,, p. 25.

[2] Total public debt in the U.S. includes the debt recorded in intra-governmental accounts like the Social Security Trust Fund. By contrast, debt held by the public, a net concept, measures the debt held by entities in the private economy and excludes the debt in these intra-governmental accounts.