by Anna Manning
John Hood writes for Carolina Journal‘s Daily Journal:
New research by two North Carolina State University professors has brought into stark relief the following facts: America is in a debt crisis, our economy is suffering as a result, and politicians of both major political parties bear responsibility.
Economists Thomas Grennes and Mehmet Caner worked with a third author, Qingliang Fan of China’s Xiamen University, to produce the paper. Published by George Mason University’s Mercatus Center, it examines decades of fiscal and economic data for the United States and several other developed countries.
Their key finding is that when the level of indebtedness in a country reaches a certain level, it becomes a drag on economic growth. Low levels of debt don’t necessarily have this effect. If institutions borrow in order to finance valuable investment — to build or expand plants and equipment, improve infrastructure, etc. — that enhances productivity. The resulting gains can more than offset the cost of the debt.
But investments contain built-in uncertainties. Not all capital projects pay off. We generally borrow to fund the best bets at first, then the next-best gets, and so on. The more we borrow and spend, the less likely the spending will be worth it. What’s worse, we don’t always borrow to invest. We use credit to buy things for immediate consumption.
That’s not a big deal in small amounts. And it’s not necessarily disastrous even in large amounts if the good we purchase lasts a long time and has resale value, such as a house. But large-scale borrowing to fund large-scale consumption is foolish.
Read more here.