Paul Krugman: Debt and Growth: The State of the Debate


 

So, after a brief diversion into issues of manners and etiquette, I hope we’re back to the substance. And there are really three points that have been established; I’m not sure that everyone understands that any one of those points is enough to refute most of the debt/deficit discussion of the past three years.

1. There is no threshold at 90 percent, even though that claim has dominated a lot of policy discussion for three years. The appearance of such a threshold in the original Reinhart-Rogoff paper was an artifact of missing data (not deliberately, and perhaps unavoidably, but that’s not the issue here) plus an odd statistical technique. Indeed, it was in large part an artifact of the treatment of just one country, New Zealand, in the postwar years.

2. There is a mild negative correlation between debt and growth. Even if this is interpreted as a causal relationship, however, it is not a strong enough correlation to justify the debt panic of recent years. Brad DeLong’s version:

as best as I can tell we are talking that an increase in debt from 50% of a year’s GDP to 150% is associated with a reduction in growth rates of 0.1%/year over the subsequent five years…

3. There is pretty good evidence that the relationship is not, in fact, causal, that low growth mainly causes high debt rather than the other way around.

We’ve spent three years letting policy be dominated by unwarranted fears.

Debt and Growth: The State of the Debate – NYTimes.com

This entry was posted in Austerity, Debt, HomeWork, Macroeconomics, Paul Krugman. Bookmark the permalink.

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