I’m not as taken with debt-deleveraging explanations of the Great Recession as some people (I think they involve a fair amount of mixing up cause and effect) and the above chart from the McKinsey Global Institute isn’t the prettiest thing in the world. But it shows that the United States has been leading the world in terms of progress on reducing total indebtedness in the wake of the crisis. Big federal budget deficits have been offset by sharper declines in private debt, and our growth situation, while by no means good, has been better than what you see in a lot of other countries.
The basic policy lesson here should be to re-enforce the IMF’s warning against premature fiscal austerity. A country that has a lot of excess capacity and has the ability to borrow at low interest rates and whose private sector is deleveraging quickly ought to avoid efforts to reduce public sector debt. A path where total debt falls is a perfectly reasonable place to be, and prematurely tightening the fiscal screws can undermine private deleveraging. The looming hike in payroll taxes is to the point. If there is no extension, then disposable personal income will drop and the public sector savings will be offset in the private sector as slower sales for businesses and higher debt:income ratios for households. Since the federal government can raise the debt more cheaply than can firms or households, it makes more sense to leave it on the federal books than to hike taxes.