The wrong logic in the GDP debt debate-Twin Cities

We are navigating our economy through unknown waters. In addition, these waters are not the peaceful South Pacific as seen by early European explorers. Instead, they are full of rocks, shallows, and unknown currents, where roaring storms can come from.

Edward Lotman

When faced with such unknown situations, sailors must ensure that the compass and radar are accurate and reliable.

Applying this metaphor to our economic situation means using economic insights that are most supported by theory and history.

Unfortunately, not all policymakers understand these concepts, nor do influential political commentators. David Brooks of the New York Times made this point in his PBS Newshour comment on May 28. As a nominally conservative expert, when evaluating the economic proposals of the Biden administration, he said: “As we all know, if your debt exceeds 100% of GDP, your country will be in trouble.”

This assertion is simply wrong.

The question is not whether it is good to increase a country’s debt relative to the value of its output. Generally speaking, it is not. However, in many cases, it is still an option. The question is whether theory and history convince most economists and policymakers of a certain fixed point, such as 100%, that is, the rising debt-to-output ratio suddenly opens the switch and economic “trouble” begins.

Brooks is one of my favorite national commentators. He is knowledgeable, insightful, expressive and humane, and is a gentle and conservative person. He has worked for William F. Buckley, the Hoover Institution and the Wall Street Journal. He is good at the development of philosophy, sociology, and even neuroscience. The economy is his weakness. He really did not pay attention to the research of the past 50 years, nor does he seem to pay attention to the current broad debate in the subject.

A kind of “truth” that is obvious on the surface and generally accepted. The sun rises, the underwater mountains, the delicious ice cream, and pancreatic cancer often lead to death are all clichés.

There is an old saying among economists: market signals from supply and demand are often effective in allocating resources; sometimes the market “flies”; international trade is not zero-sum, it usually makes both trading countries live better; emission taxes It should be the first choice for pollution control.

However, the idea that a country’s debt value exceeds 100% of the value of a year’s output will definitely harm its economy is not a cliché. there has never been. Indeed, 51% of economists believe that this is difficult now and at any time in the past. In 40 years of university teaching, I have never encountered this situation in a textbook.

Yes, individual economists have put forward this argument. The most famous ones are Carmen Reinhart and Kenneth Rogoff. Their non-peer-reviewed paper published in the American Economic Review in 2010 argued that when a country’s “total foreign debt reaches the value of GDP” At 60%, its annual growth rate dropped by 2%” and the GDP growth of “over 90%” was “approximately halved.” That paper may be the source of Brooks’s statement. But it caused great controversy among economists and was sharply refuted. This of course has never been a truth, or even a simple consensus.

Their papers made me miserable. Just as Brooks is an expert I respect very much, Rogoff is one of my most admired economists. But this is a terrible paper based on very flawed assumptions and methods, including logical errors that have been warned in every published introductory textbook on economics or statistics.

Researchers tabulated data on debt and output levels in dozens of countries over a long period of time (centuries instead of decades). These countries are divided into several categories or “buckets”, but without considering the size of the country, the absolute level of foreign and domestic debts, taxes or government expenditures, exchange rate regimes, or several other related factors.

When other researchers discovered that some key years in New Zealand were missing from the spreadsheet, it initially caused confusion. The authors corrected this and claimed that their conclusion was valid. However, there is little controversy about whether the experience of a small country like New Zealand will affect what might happen in the United States, Japan, Germany, or any other country in 60 years. Very different situation.

Finally, the study is a set of non-comparable data on countries with large differences. On average, these data show some kind of negative correlation between debt and output. However, introductory textbooks of statistics and economics always warn freshmen that “correlation is not causation.”

In addition, there is a huge difference around the average. It is common for countries with high debt levels to perform well. In addition, in countless cases, countries with debts well below these thresholds are caught in deep-seated problems.

Some successes are notable. Keep in mind that GDP was not actually tabulated until the late 1940s, so early figures are estimates and are usually rough. But in 1815, Britain ended its 25-year war with a debt-to-GDP ratio of around 240%. The 1800s was the fastest period of output and income growth in British history. At the end of World War II, our country’s debt was approximately 110% to 125% of GDP, depending on the indicators used, and the subsequent 1950s and 1960s had higher output growth rates than any subsequent decade.

All this seems to be a small point of contention among a few scholars. It is not. Ideas have consequences. The flawed Reinhart-Rogoff article was used to justify the “Paul Ryan budget,” which emphasized spending restrictions because the US economy was still dragged down by the financial frenzy of the 2000s. Other countries, especially Germany in the European Union, have also cited this point when calling for austerity policies.

We are facing deep-rooted economic chaos, and we firmly refuse to deal with federal fiscal problems for 35 years. We lower the tax rate so that the proportion of national income paid in general taxes is much lower than in the past, including the 1950s or 1990s. Failing to keep up and improve infrastructure or provide healthcare more efficiently, we have eaten our corn seeds. There is a lot of room for debate on many aspects of Biden’s plan, but let’s abandon the threat of triggering some catastrophic debt to output triggers.

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