Friday, 13 December 2013
Two more attempts to show that debt stymies growth.
That’s “more” as in “in addition to Rogoff and Reinhart’s efforts”.
First, Costas Milas studies the relationship between UK public debt and growth between 1831 and 2013 and finds that debt is negatively correlated with growth. I’m not surprised.
During the first 75% or so of that period (i.e. up to WWII), the ways in which and reasons for which debt was incurred were very different from the last 25%. In other words it wasn’t till after WWII and Keynsianism was fully accepted. That had the following consequences.
Where a government borrows more, interest rates will rise. And assuming nothing is done about those interest rate increases, the result may well be reduced growth. In contrast, borrow and spend a la Keynes consists of borrowing and spending PLUS negating any interest rate increase that results from that borrowing. Thus the net effect should be to increase growth.
Indeed, not only will a central bank NEGATE any interest rate rise coming from a bout of “borrow and spend”, the central bank may well REDUCE interest rates, assuming the central bank thinks stimulus is justified: witness the fact that over the last three or four years, central bank rates have fallen to record lows for a record length of time.
Thus to draw any conclusions from the undesirable effects of increased borrowing prior to WWII for us in 2013 strikes me as questionable.
European Commission study.
The second study, done by the European Commission looks at 74 consolidations and finds that about half of them had no growth reducing effect. The problem there is that nearly all the consolidations were in the 1980s and 90s, a time of decent growth: exactly the scenario when it’s possible to consolidate without adverse effects. (The study was done way back in 2003, but I stumbled across it on this blog.)
Indeed, given enough private sector exuberance, government HAS TO consolidate, else there’ll be excess demand and inflation. The same thing was going in the US at that time. I.e. Bill Clinton ran a surplus during his presidency (1993-2001). But I don’t think it was the surplus that CAUSED the decent economic growth in the 1990s in the US.