With Rising Debt, the U.S. Federal Government Is in Bad Company
Governments around the world have been on a borrowing spree, and prosperity has suffered.
Misery loves company, as they say. But does financial irresponsibility also enjoy spending a little quality time with friends? If so, it's quite a party. While the U.S. government is famously running up debt to stratospheric levels, governments around the world have been spending beyond their means and borrowing to make ends meet. The likely result: financial markets put at risk by over-extended governments and slow economic growth for pretty much everybody.
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Soaring Government Debt Everywhere
"Public debt as a fraction of gross domestic product has increased significantly in recent decades, across advanced as well as emerging and middle-income economies," write Tobias Adrian, Vitor Gaspar, Pierre-Olivier Gourinchas for the International Monetary Fund (IMF). "It is expected to reach 120 percent and 80 percent of output respectively by 2028."
Public debt—money borrowed by governments—has steadily risen, they add, because years of very low interest rates "reduced the pressure for fiscal consolidation and allowed public deficits and public debt to drift upwards." Then, COVID-19 disrupted the global economy and governments responded by funding "large emergency support packages" on credit.
Now, with interest rates rising, the cost of servicing debt is going up, too. But governments continue to borrow as if nothing has changed. Of course, riskier governments have to pay higher interest rates.
"On average, African countries pay four times more for borrowing than the United States and eight times more than the wealthiest European economies," United Nations Secretary-General António Guterres cautioned last summer with the release of A World of Debt: A Growing Burden to Global Prosperity. "A total of 52 countries – almost 40 percent of the developing world – are in serious debt trouble."
As of 2022, that report revealed, global public debt stood at $92 trillion and rising. Interest payments displaced other expenditures in a growing number of nations, especially developing countries. High public debt crowds out financial room for everything else, including the ability of private parties to borrow for starting or expanding businesses that create jobs and build wealth.
Public Debt Crowds Out Private Investment
"Households who buy government debt reduce their savings in productive private investments," Kent Smetters and Marcos Dinerstein wrote in 2021 for the Penn Wharton Budget Model. "As the spending is unproductive, the economy is poorer and total savings is lower due to capital crowd out."
"Government spending redirects real resources in the economy and can crowd out private capital formation," they add. "An additional $1 trillion debt this year could decrease GDP by as much as 0.28 percent in 2050."
If you take that insight and apply it to a world of governments on a collective borrowing spree, you end up with a hobbled global economy where prosperity becomes increasingly elusive.
"Medium-term growth rates are projected to continue declining on the back of mediocre productivity growth, weaker demographics, feeble investment and continued scarring from the pandemic," note IMF's Adrian, Gaspar, and Gourinchas. "Projections for growth five years ahead have fallen to the lowest level in decades."
Heavy government borrowing also creates risk for the financial sector by putting banks at the mercy of massive debtors of uncertain creditworthiness. "The more banks hold of their countries' sovereign debt, the more exposed their balance sheet is to the sovereign's fiscal fragility," note the IMF analysts.
Heavily indebted governments also reduce their ability to act as backstops in case of financial crisis as they become the likeliest causes of crises of the future. As they continue to borrow, they reduce the likelihood that productive private economic activity will grow them out of their financial problems.
"Higher government debt implies more state interference in the economy and higher taxes in the future," The Economist points out in its interactive overview of global government debt. Also, add the editors, rising debt "creates a recurring popularity test for individual governments" which often goes poorly in terms of fiscal responsibility because paying outstanding bills isn't popular with voters.
Higher Debt Leads to Lost Prosperity
Well, isn't that cheerful? It's also extraordinarily unfortunate. After thousands of years of grindingly slow progress, recent decades saw the human race escaping poverty. According to the World Bank, even as populations increased, the number of people living below the poverty line, adjusted for inflation, plummeted from 2.01 billion in 1990 to 689 million in 2019.
In 2016, the economist Deirdre N. McCloskey attributed improving prospects for so many of the world's people to "liberalism, in the free-market European sense."
But that progress reversed in recent years, with poverty blipping back up (712 million people in 2022) amidst slower economic growth and after drastic government interventions during the pandemic. A future of stumbling economies hobbled by debt-ridden governments that crowd out private investment is one in which more people are poorer than they would have been if the world had stuck with free markets and implemented a modicum of financial responsibility.
As concerned as the U.N. is about rising public debt, its proposed "solutions" are pretty much what you would expect from that organization. A lot of verbiage about a "more inclusive" system providing "increased liquidity" and "affordable long-term financing" boils down to letting the riskiest governments have a greater say in offering themselves cheap financing. What could possibly go wrong?
The IMF analysts, on the other hand, propose "durable fiscal consolidation" while "financial conditions remain relatively accommodative and labor markets robust." I take that as a gentle suggestion that governments need to start paying down their debt to sustainable levels before interest rates and economic conditions deprive them of any options in the matter.
Gentle suggestion or not, governments need to get their fiscal affairs in order before they take us all down with them. Heavily indebted governments result in burdened economies that lead to a poorer world for everybody. With its irresponsible borrow-and-spend ways, the U.S. government is, unfortunately, not alone. Most if not all world governments are hanging out in very bad company.
