Every economist knows that debt can be a good thing. It can help companies expand, it can provide individuals with the opportunity to make investments in themselves, and it can provide the necessary funding for social programs. All in all, a modest amount of debt is a key ingredient for healthy growth. However, the working summit at The Atlantic’s third annual Economy Summit found that the global economy is still far from achieving that healthy amount of debt. Of all the issues facing the domestic and international economy, high levels of debt pose the most significant threat to continued economic growth and stability.
Debt is no stranger to the spotlight when it comes to discussions about the economy. Political rhetoric in the United States over the past five years has obsessed over public-sector debt (although certain people, such as Thomas Hungerford of the Economic Policy Institute, see the debate as more of a distraction than anything else), and the ongoing euro zone crisis was sparked at least partly by the high levels of debt incurred by the member-states of the European Union. The major difference this year, though, is the variety of debt that analysts are pointing to as risk factors in their economic outlooks.
In the United States, public debt has apparently lost its position as Public Enemy No. 1. According to Peter Morici, a professor of economics at the University of Maryland, the primary cause for concern is now student debt. Student debt topped $1 trillion last year, according to Businessweek, and the Consumer Financial Protection Bureau has named student debt as one of the reasons why young adults are shying away from the big consumer purchases – for example cars and homes – that drive the economy. Meanwhile, young adults aside, many other Americans are once again spending beyond their means after several years of relative austerity. American household debt is on the rise, signaling increased confidence in the economy, but also the possibility of individuals struggling in the face of continuing unemployment and stagnant wages.
The other problem area may surprise some people. It’s not Europe (although plenty of issues remain there). The much ballyhooed BRIC countries and other emerging market economies are suddenly showing signs of vulnerability Craig Alexander of TD Bank, Karan Bhatia of General Electric, and Sherle Schwenninger of the New America Foundation all pointed to the dramatic rise in corporate and household debt in the developing world as the most significant threat to the global economy. The prime example is China, whose economic troubles have been well-documented in the media, but India, Turkey, Brazil, and other economic darlings also face the same challenges. All of these countries received vast amounts of cheap capital from the West during the quantitative easing period. Now, with those programs coming to an end, corporations and individuals are finding that they may have overleveraged themselves a bit too much – a reality that threatens the continued economic vitality of these markets, and the rest of the global market as well.
The news isn’t all bad, though. Amidst all this talk about debt, a glimmer of hope did emerge. The U.S. economy, propelled by revolutions in energy production and technology innovation, is predicted to grow by 2.9 percent this year, and will continue on a modest upward trajectory going forward, analysts say. The European economy, despite its remaining high levels of public debt and concerns about its banking system, is expected to grow by 1.5 percent in 2014 and 2.0 percent in 2015. Even Spain, one of the southern European countries hit hardest by the euro zone crisis, is expected to exit a brutal two-year recession this year with a 1 percent growth rate.
The message is clear: The debt crisis hasn’t disappeared – it has simply changed its name and address. Despite some encouraging signs out of the United States and Europe, the danger of a new crisis – whether it is from the weakness of the BRICs or the widening income gap in the United States – remains, and it will require smart policymaking to ensure that the economic recovery is given an honest chance. Let’s just hope Washington is listening.