Growth and Debt Reduction

February 11th, 2013 at 7:23 pm

Some readers thought I buried the lead in this post on recent debates around debt stabilization.  In this conclusion to that piece, I wrote:

…economic growth is really the most overlooked variable here.  At least in my lifetime, the only time I’ve ever seen the debt ratio fall in earnest was when the economy was at full employment.  Though we relentlessly target the numerator of the debt ratio, the real action is in targeting the denominator.  That doesn’t invite fiscal profligacy—if you want to hang with the cool kids, you’ve got to be a CDSH [cycical dove, structural hawk].  But it does suggest that once again, we’re looking for fiscal rectitude in all the wrong places.

So where’s the evidence for that claim?  I was largely thinking about the 1990s, when real GDP grew fast enough to more than close the output gaps present in the early part of the decade.  The figure below plots output gaps, defined as the percent that potential GDP is above or below actual GDP, against percentage point changes in the debt/GDP ratio.  The circled part shows the output gap  in the 1990s moving from out -5% to +5%, against a huge slide in the debt/GDP ratio, from 49% in 1993 to about 33% in 2001.

But the first part of the figure is informative as well–GDP was mostly above potential in those years, meaning there were relative few periods of negative output gaps, and the debt ratio was mostly falling.

Now, of course, much of these movements are mechanical and cyclical: growth falters, output gaps grow, and as anti-recessionary measures ramp up and fewer revenues flow in, government debt rises–that’s why the negative correlation, shown in the table, is quite large (-0.78).  But that’s just another way of saying there’s no plausible reason to jam growth in the interest of deficit or debt reduction.  It won’t work.

To close out, over to the great John Cassidy from a recent post on UK austerity:

In short, the U.K. experience shows how austerity policies, when applied without  regard to the state of the economy, often lead to more government borrowing and  debt creation, not less. In the past few years, we’ve seen pretty much the same  thing happen in other European countries: Greece, Ireland, Portugal, and now  Italy and Spain. Still, though, many proponents of austerity refuse to  acknowledge their errors.

Sources: OMB, CBO, BEA




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3 comments in reply to "Growth and Debt Reduction"

  1. urban legend says:

    For so long as over-educated progressives insist on calling it “austerity,” they will fail to get public traction for ridiculing the so-called “deficit hawks” out of their control of the public discourse. That’s the Democrats’ curse: since abandoning labor and embracing the corporate and intellectual classes, they have been unable to resist the four-syllable, Latin-based words like “austerity” and “stimulus” that only graduate school graduates understand.

    It takes hard work to develop the right framing for these concepts, work that the progressive Democrats as well as the compromised Democratic establishment have been too lazy to do. But for starters, “austerity” should be “growth-killing policies,” and “stimulus” should be, as it should have been in 2009, a “job-growth program” or simply a “jobs program.” When it’s for infrastructure programs (as it mostly should be for [a] effectiveness and [b] political power), a mantra should accompany every discussion: “for long-term, valuable, well-paid and non-outsourceable American jobs that are necessary for the U.S. to modernize the economy.” Austerians should be “job killers.” They should be “self-defeating” job-killers, too, “because deficits only get worse when people are out of work.”

    We shouldn’t be conceding that the austerians are “deficit hawks,” either, because hawks at least are strong and resolute birds who get their prey. Geez, did anybody bother to realize that our frickin’ national symbol is a hawk? “Deficit Sheep” who fall for stupid billionaires’ propaganda would be better imagery. “Deficit Puritans” might work, too, since everybody hates being thought of as a pursed-lipped Puritan. (I’m no Puritan, but . . . .) Krugman’s “Deficit Scolds” is in the right direction, but scold is a pretty old-fashioned word that was going out of use when my grandmother used it — and I am well-past old enough to be a grandparent, too.

    Inflexible rule: Wherever possible, one-syllable, Anglo-Saxon words only. the only exceptions: words like “Puritan” which, while Latin-based with three-syllables, has passed into universal familiarity.

    • mitakeet says:

      No clearer words have I read on this topic. Your framing is _exactly_ what should be going on. I admit I am guilty of obfuscating the topic (not intentionally) because I talk about how cheap money is and how we could pay the principle and interest on any infrastructure loans out of the increased tax base. However, when speaking to the masses, I agree 100% with your analysis: my verbiage is meaningless gibberish.

      Of course, I also firmly believe that most Democrats are wolfs in progressive clothing and would have to look up the definition in order to describe themselves. I consider ourselves in an oligarchy and the vast majority of angst between conservatives and progressives (throw some libertarians in for good measure) is nothing more than the cape the matador uses to distract the bull.