Rogoff and
the Reinharts recently published a paper entitled “Public Debt Overhangs…”.
They rarely use the word debt without the suffix “overhang”. You’re supposed to
imagine yourself under a cliff with “debt” hanging over you and about drop on
your head.
I suspect it
says something about the weakness of their arguments that they employ that sort
of propaganda.
They claim
debt to GDP ratios over 90% tend to lead to low growth for the next decade or
two. The tendency is not a strong one, but I have no quarrel with their claim
that the tendency is there.
As to
possible CAUSAL effects running from large debts to poor growth, they offer
just one possibility namely that those debts crowd out private investment,
either via a quantitative effect or via a price effect (i.e. large government
borrowing raises interest rates).
As to the
interest rate effect, they themselves say (p.83) that there is little
relationship between high interest rates and growth. So that rules out the
price effect.
As to the
quantitative effect, that is a possibility.
However,
there is simpler explanation as follows. Politicians and a significant
proportion of the economics profession just don’t understand deficits, debt,
and so on. That is, most politicians and too many economists see national debts
and deficits as working in the same way as household debts and deficits. I.e.
the latter individuals just don’t understand macroeconomics – or at least
macroeconomics as it applies to national debts and deficits.
To expand on
that, the above misguided individuals think the best way to reduce national
debts is to raise tax or cut public spending, in the same way as a household
has to raise its income or cut its spending if it wants to speed up the reduction
in any debt it owes. (We must be thankful that at least Rogoff & Co don’t
fall into that trap.)
And of
course the result of that crude application of microeconomics at the
macroeconomic level is to bring about a reduction in demand: it condemns an
economy to operating at below capacity.
Moreover,
about half of the countries and periods of elevated debt examined by Rogoff
& Co were in the pre-Keynsian era. That was an era in which the above
“crude” thinking was dominant. So there is possibly a very simple explanation
for the “high debt leads to low growth”: ignorance on the part of the elite.
Unfortunately
we are in danger of returning that at “crude” era, as Krugman points out.
Or rather, we’re
already there. Why are there millions more unemployed in the U.S. than there
should be? Reason is that about 95% of members of Congress don’t understand the
above macro/micro point. Nor do politicians in other countries. Plus
Republicans and Democrats are more interested in squabbles which involve the
unemployed being caught in the cross fire than doing anything about the
unemployed. Or as former defence secretary Robert Gates accurately put it, they
are more concerned with “scoring ideological points than with saving the
country”. (h/t to Mike Norman)
That’s not
to say that Keynes’s ideas are necessarily the best solution and that
structural facts might not be the main explanation of high unemployment (though
I suspect that structural factors are NOT the explanation). The point is that
even if it was 100% clear that structural factors were not the culprit, the
West’s politicians would still make a hash of trying to implement Keynes’s
ideas. Plus my guess is they made a similar hash of it prior to Keynes when
trying to reduce national debts.
H/t to John
Cochrane for bringing Rogoff’s paper to my attention.
No comments:
Post a Comment
Post a comment.