Following another disappointing first quarter for the U.S. economy, many economic policy experts are once again asking: “What, if anything, can be done to accelerate the United States’ persistently soft recovery?”
One dimension of this debate is whether the U.S. government should be doing more to stir up demand, even if this means taking on more debt. Given the United States’ already sizeable existing obligations, I’m skeptical that another debt binge is in the interest of the country or the economy. Here are four reasons for my skepticism of massive, debt-fueled government stimulus.
1. There’s a lack of clear evidence it will work
Historically, there has been no correlation between government borrowing and gross domestic product (GDP) growth. In other words, debt-fueled government spending hasn’t been associated with faster growth. To my mind, the onus is on those arguing for more debt to draw a clear path between further borrowing and economic growth.
2. An aging population is already challenging government finances
An older population will challenge the U.S. economy in a number of ways. Slower work force growth will make it harder for the United States to achieve its historical growth rate. In addition, an older population will put increasing pressure on government entitlement programs, which were designed at a time of shorter lifespans and retirements.
3. There is already too much U.S. government debt
Gross U.S. federal debt is at around 100% of GDP, a level historically associated with slower growth. And this gross debt doesn’t include unfunded liabilities related to the country’s pension and medical programs.
4. America has too much debt in general
Tales of the United States “deleveraging” aren’t completely accurate. U.S. household balance sheets certainly are in much better shape than they were pre-crisis, and the financial sector is less levered. That said, overall non-financial debt in the United States has increased from $32 trillion on the eve of the financial crisis to more than $41 trillion today. Even after adjusting for the growth in the economy, the best you can say is that U.S. debt has stabilized. The ratio of non-financial debt-to-GDP is nearly 235%. While this is down a bit from the 2009 peak of 240%, debt is still disturbingly high from a historical perspective. The 60-year average is just 160% and even as recently as 10 years ago, non-financial debt was only 200% of GDP.
None of the above suggests that there isn’t an opportunity for well-targeted government spending. Infrastructure spending, for instance, could help improve U.S. productivity and long-term growth. But focused public-private partnerships to address the country’s aging infrastructure shouldn’t be synonymous with another massive stimulus program.
My view is that the U.S. economy is in the midst of a recovery, and growth should re-accelerate in the second quarter, or at least in the second half. That said, I would agree with those who argue that the recovery isn’t likely to take us back to the glory days of 3.5% to 4% annual growth. A massive build-up in debt is unlikely to change this, and it would probably make things worse.
Source: Bloomberg, BlackRock research