US high growth is better than German low debt


A metaphor for the German economy? — Bloomberg

TO paraphrase that famous poem, I look at America’s debt burden and despair.

Both Republicans and Democrats like to say they are serious about debt reduction, but then they just spend more or cut taxes.

Meanwhile, “saving” entitlements has basically come to mean not touching them – making it likely that their projected shortfalls will eventually have to be paid with more new debt.

Then again, I sometimes tell myself, it could be worse: We could be Germany. Because as bad as it is to have too much debt, it’s even worse to have not enough growth.

In the era of very low interest rates, the relationship between growth and debt became the excuse to abandon fiscal responsibility.

So long as a country’s growth rate was higher than its interest rates, the thinking went, its revenue would outpace its debt.

Or, put another way: Debt is not a problem so long as the rate of growth exceeds the rate of interest.

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There’s only one catch. Growth is unpredictable, as are interest rates.

There is something to the idea that a growing economy can handle more debt, but the United States is now in the worry zone, with the real 10-year bond yield nearing 5% and nominal gross domestic product (GDP) growth at about 5% in the last quarter (2.2% accounting for inflation).

If the United States doesn’t start paying off its debt soon, service payments will start taking up more and more of the federal budget.

At the same time, it’s not an exaggeration to say that America’s economy is currently the envy of the world.

Consider Germany, which is famously averse to debt. Its debt-to-GDP ratio is a modest 63%, compared to the US’s 123%. Nominal 10-year bond yields are only 2.62%.

But Germany’s growth rate in the third quarter of 2024 was just 0.2%, accounting for inflation, and the outlook is not much better.

All things considered, it is worse to be Germany than America – because Germany faces deeper structural issues that impede its growth prospects.

Low growth has been a regular feature of its economy for decades.

Germany did undertake a series of labour market reforms in 2002, which boosted growth and employment, and its manufacturing sector grew and demonstrated some productivity.

Things looked good for a while. But the last few years show the risks of fetishising manufacturing as a stable and predictable way to grow the economy.

Germany fixed only part of its problem – a ridged labour market – and never tackled its deeper problem – an aversion to risk.

More recently, as its manufacturing industry faced more foreign competition and rising energy costs resulting from its dependence on Russia, Germany saw its growth rate slow down or even turn negative.

This points to a deeper problem with the Germany economy: It lacks the risk-taking culture necessary for sustainable growth.

It is very hard to start a business in Germany, and unlike in the United States, failure is costly and carries a stigma.

A German aversion to personal data collection poses extra challenges for any business reliant on artificial intelligence or machine learning.

Germans are also notoriously reluctant to invest in risky assets, preferring the certainty of their low-yield bunds.

In fact, while their low debt levels are in some ways enviable, in many ways they are just another indicator of a culture of risk aversion.

The lack of openness to risk and change is one reason Larry Summers called Europe “a museum” (it does have a lot of very nice ones, but he was referring to its economy).

The United States, for all its faults, is still a centre of innovation.

And while there are concerns that President Donald Trump will impose tariffs and initiate deportations, which would be bad for economic growth, he also wants lower corporate taxes and reduced regulation, which would enhance growth.

As an economist, I am obligated to note that there are tradeoffs to both the German and American approaches.

If you aim for higher growth, be prepared for higher volatility. If you opt for more certainty, don’t be surprised by more stagnation.

Growing faster than Germany is a pretty low bar.

Americans should be grateful that they are part of a high-growth economy – and vigilant about their high-debt government.

More debt increases interest rates, which can eventually undermine growth.

Getting growth right is harder than getting your fiscal house in order.

But that is not a reason for the United States to ignore its debt problem. — Bloomberg

Allison Schrager is a Bloomberg Opinion columnist covering economics. The views expressed here are the writer’s own.

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