The authors find that in prior instances of debt levels above 90% of GDP are associated with an average growth rate of 2.3% (median 2.1%) versus 3.5% during lower debt periods. Notably, the average duration of debt overhang episodes was 23 years, implying “a massive cumulative output loss.”
And that’s not all:
“Contrary to popular perception, we find that in 11 of the 26 debt overhang cases, real interest rates were either lower or about the same as during the lower debt/GDP years. Those waiting for financial markets to send the warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time.
One might argue that financial globalization has made it easier to carry high public debt burdens, but we see no compelling evidence that this is the case for advanced countries as a whole. Moreover, do not undercount the sophistication and interconnection of national markets in the 19th century, half the timespan covered.
Here is the nifty and mildly terrifying table summarizing their findings about those 26 cases. The horizontal axis tracks real interest rates observed in the overhang period, while the vertical tracks GDP.
The lesson: odds of achieving higher growth at +90% debt/GDP levels is going to require more than lever pulling.
You can download the paper at NBER.