Jonathan Berk and Jules van Binsbergen argue that debt-to-GDP ratio is a flawed measure of government indebtedness. The duo claims that this metric compares a “stock” variable (debt) to a “flow” variable (GDP), leading to distorted conversations about the sustainability of rising debt levels.
Berk credits economists Carmen Reinhart and Kenneth Rogoff with popularizing the debt-to-GDP ratio in 2010, but notes that there’s no solid economic justification for focusing on it. Instead, Berk and van Binsbergen introduce two alternative measures: debt-to-equity and interest-to-GDP. These measures paint a more nuanced picture of government indebtedness.
Debt-to-GDP levels have surged to historic highs in the US and other large economies, leading economists and policymakers to fear slower growth and defaults. However, Berk argues that these concerns are overstated, pointing to Japan’s high debt-to-GDP ratio without defaulting issues and Argentina’s lower level of debt with a history of default.
Berk suggests focusing on the budget deficit instead of government indebtedness, questioning how the country will balance its spending and revenue. This shift in focus may be more productive than fixating on an allegedly flawed measure like debt-to-GDP.
Source: https://www.gsb.stanford.edu/insights/what-if-were-looking-national-debt-all-wrong