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High Government Debt Leads To ‘Panic And Contradictory Policies’: Study

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Government Debt Economic Growth

President Barack Obama at the White House on Friday, April 20, 2012. A new study has found that high government debt does not directly lead to lower economic growth.

It might not be government debt itself that’s a danger to the U.S. economy.

That’s because government debt does not necessarily lead to lower economic growth, according to new research. Rather, while higher debt levels are often correlated with lower economic growth, that is largely because governments with more debt slashing spending, according to the study by economists Ugo Panizza and Andrea Presbitero. (h/t The Washington Post)

In other words, big federal deficits might lead to less growth, “but only because high debt leads to panic and contractionary policies,” the authors write.

Panizza and Presbitero found that debt did not have a negative effect on economic growth in the advanced economies that they studied.

The authors of the report emphasized that no economic research has proven that high government debt causes lower economic growth, though some papers have shown there is a correlation. They argue that the correlation is largely due to austerity measures governments with higher debt are more likely to take that “in turn may reduce growth.” That’s in line with reports that the austerity recession in Greece prevented the debt-ridden country from meeting its deficit goals: Greece’s primary budget balance has yet to become a surplus.

Past economic research has found that there is a negative correlation between high government debt and lower economic growth once government debt exceeds 90 percent of GDP. But as Panizza and Presbitero point out, that research proved correlation, not causation.

Conservative politicians in both the U.S. and Europe have discouraged boosting spending and ratcheting up the government debt in part because they claim it strangles economic growth. Paul Ryan, a leading Republican, wrote on his website that the government’s “spending problem” is “hurting our nation’s ability to create jobs.”

And Republican presidential candidate Mitt Romney wrote on his website that “a decade of huge deficits could drive our principal payments and interest rates beyond our reach while starving the economy of the capital it needs to grow.” Romney’s budget plan would lead to less government spending on health care for the poor and huge cuts to other government functions.

Across the ocean, the European Union and International Monetary Fund have been forcing Greece to slash its budget in exchange for emergency loans, leading to a depression in Greece. Angela Merkel, chancellor of Germany, who has been pushing struggling eurozone countries to slash spending, said on Sunday that high debt loads prevent economic growth, and that cutting spending helps the economy grow, according to Dow Jones Newswires. “One factor to generate growth is reducing debt,” she said.

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