Public and Private Debt: The Historical Record (1870–2010)

Economists routinely emphasize the risks of excessive public borrowing, but tend to have a more benign view of private sector debt. In this study, I draw on recent comparative studies of the macroeconomic history of advanced economies since 1870. I synthesize four historical facts and argue that a more balanced view of public and private borrowing is warranted. First, while both public and private debts have increased markedly, private, not public debts have climbed to historically unprecedented levels. Second, outside war times, financial crises have typically originated in the private sector, yet the costs have increasingly been socialized. Third, the historical record shows that modern democracies have been relatively successful in managing their financial affairs, evidenced by a systematically positive response of primary balances to high debt ratios. Fourth, I demonstrate that private and public debt cycles have been tightly linked since the 1970s.