Study: Low levels of government debt is good economic policy

MoneypileSuppose you have a financial crisis that devours a large part of your income, putting you and your family at risk.

Would you rather have financial flexibility to respond to this situation, with low levels of credit card and personal loan debt? Or would it be preferable to have maxed out the credit card and gone into significant debt to finance growing “needs” before your crisis hit?

Common sense says the former is better … and new research backs up common sense when it comes to recessions and government debt.

A new study published by the National Bureau of Economic Research examined data on private credit, public (i.e., government) debt, and recessions, reporting that: (1) “high levels of public debt … slows down the economy after financial crises,” and (2) when combined with a boom in private sector credit, “high levels of public sector debt typically leads to considerably deeper recessions and slower recoveries.”

In short, if you have high levels of government debt going into an economic downturn, more people lose jobs, income, and wealth, and people go longer without the ability to support their families via steady employment.

Not surprisingly then, the researchers recommend “precautionary fiscal policy” that is designed to keep government debt levels low and maintain fiscal flexibility in the face of a recession.

Historically, and to their credit, Utah policymakers have maintained low levels of state debt relative to the constitutional limit on the debt they can issue. But the severity of the recent recession led to higher amounts of state debt than in the past, peaking in 2012 at 87 percent of the constitutional debt limit before falling slightly to 82 percent today, according to a recent legislative report on state debt obligations.

If Utah policymakers incur no new debts, the state’s debt levels are projected to make a slow and steady decline over the next decade. However, given state spending cuts necessitated by the most recent recession, the political pressure from special interests to max out debt – in other words, to max out government spending that benefits their constituencies – is likely to be significant.

It is for this reason – the constant, ever-increasing pressure from special interest groups on policymakers to spend as many taxpayer dollars as possible on a privileged few – that Sutherland has recommended a government spending amendment to bolsters the savings provisions of the state and protect against fiscal risks, such as high amounts of public debt.

This policy enshrines the hard-earned financial wisdom and prudence of current and past leaders for the benefit of future policymakers and Utahns. And like the balanced budget provision of the state constitution, it gives policymakers tools to support their natural inclination to do the right thing by pushing back against special interest group pressure and protecting Utah taxpayers from unnecessary risks, which ultimately end up harming them and their families.