"The impact of private debt on economic growth"

A Google search for how does the cost of private debt affect the economy? turned up The impact of private debt on economic growth, a 37-page PDF by Martti Randveer, Lenno Uusküla, and Liina Kulu of Eesti Pank, the Bank of Estonia. It is available for download at the Bank's working paper page and at IDEAS.

So far I only read the abstract. But I find two interesting things.

1. The first two sentences:

Both theoretical and empirical evidence show that recessions are steeper in countries with high levels of private debt and/or credit booms. But do these negative effects carry over to the period where the recession is over and the economy recovers from the crisis?

They ask a very good question.

2. The next three sentences:

In this paper we look at economic recovery episodes and relate the growth performance of countries with their debt levels and debt growth before the beginning of the recession. We find that a higher level of debt before a recession is correlated with smaller economic growth after the economic slowdown has finished. In contrast, higher credit growth before a recession is associated with higher GDP growth after the crisis.

Let me repeat their findings:

We find that a higher level of debt before a recession is correlated with smaller economic growth after the economic slowdown has finished. In contrast, higher credit growth before a recession is associated with higher GDP growth after the crisis.

Very nice.

In addition to their results, I like their thinking. They say something I have not seen anyone else say, other than myself. They distinguish between "a higher level of debt" and "higher credit growth".

I've about given up on it because nobody seems to understand, but I would always point out the difference between debt and credit use. Credit use creates debt and gives you money to spend. After you spend the money, all that's left is the debt.

Debt is an accumulation over time. A new use of credit happens in the present moment.

Debt is a stock. Credit use is a flow.

Debt is a drag on the economy. Credit use is a boost to the economy.

Debt and credit are yin and yang. Yang and yin.

Anyway, I'm glad to see I'm not the only one who distinguishes between debt and the use of credit.

3. What the hell, here's the rest of the abstract:

The effects of debt on consumption are more negative, implying that after recessions people consume less and save more than they did in the period before the recession. However, the overall economic effects of the debt measures on GDP and consumption growth are limited.

I can easily accept their finding that consumption is more strongly affected by debt than other sectors. But I think their last sentence there is wrong. I don't think the overall effects of debt on GDP are limited. It is debt that brings down civilizations.