Debt Overhang
Carmen Reinhart offers an interesting history lesson:
“After 1830, U.K. debt
remained above 100 percent of GDP through the 1850s, as the chart shows. Far
higher debt levels were recorded for the Netherlands in this period, with less
benign outcomes through most of the 1800s. How were these two countries able to
support such high debt loads for decades? Both played a prominent role as
international financial centers; and in both cases, high public debt coexisted
with high private saving. The two nations, in effect, were creditors to the
rest of the world -- unlike the U.S. today.
The U.K. and the
Netherlands enjoyed a substantial and well-documented transfer of resources
from their colonies that no modern economy can count on. Other structural
forces were in play, too: Peacetime reductions in military spending helped to
reduce their debts. Today, structural forces -- notably, the fiscal demands of
aging populations -- are mostly pushing the other way.”
Econometrics & Economic Policymaking
Meanwhile, the importance of looking beyond models is highlighted in this profile of economist Sharon Kozicki