What explains bigger debt but a smaller debt burden? An economy growing faster than the debt. Slow or falling nominal GDP growth is what creates debt problems. As Scott Sumner wrote about the euro crisis:
Lots of news articles on the eurocrisis focus on the sky-high interest rates now being paid by the Spanish and Italian governments, roughly 6%. But I rarely see people pointing out that until a few years ago 6% interest rates on government bonds were completely normal. As was the 70% ratio of public debt to GDP that you see in Spain. So why is this interest rate now such a crushing burden? Simple, in the old days 6% interest rates were accompanied by much more robust NGDP growth rates. The problem today in the periphery is that NGDP growth has collapsed.
James says we need to understand the relationship between growth and rates. It is not clear that DC is bankrupt if GDP growth goes faster than interest rates; DC can make up in taxes what it needs to cover increased debt charges. But, and a big but, growth has been slowing as DC debt increases since 1980. Hence, the best assumption we can make, unless new information arrives, is that growth continues to decline, or stays near zero. And that is the null hypothesis.
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