Governments all around the world have increased their debt to fight the recession. There is a growing concern this debt may have a cost in the form of slower economic growth. N.C. Cooperative Extension economist Mike Walden explains that there is a point at which this cost kicks in.
“Economists are referring to this as the tipping point. It’s a point after which we reach that the debt becomes a drag on the economy. And this occurs in the form of the fact that we make interest payments that are much larger, so this means more of the government’s money is going to interest payments. It takes more taxes and resources out of the private sector, and therefore we don’t grow as fast.
“So the big question is, Where is this tipping point? Where is that sort of danger level where if we go over it the debt becomes a drag on the economy? And there have been a number of recent studies especially that have tried to pinpoint this. The general conclusion is it is around 80 to 90 percent of our total economy. That is, when our public debt becomes about 80 to 90 percent of what we call gross domestic product, or the total amount of output of goods and services in the country, then if you go beyond that you do see that that debt becomes a major drag on the economy.
“Right now we are just getting close to that level, so I think that’s why there is a lot of concern about the amount of debt we have at the public level.”