Debt and Growth: The Politics of Ideas

The Economist provides a concise discussion of the debates surrounding the impact of debt on economic growth. The focus is on the work of Carmen Reinhart and Kenneth Rogoff, drawing on some of the research they conducted for their fine book This Time is Different.  The Reinhart/Rogoff paper (link here) had a simple takeaway point: debt seems to have little impact until it reaches 90 percent of GDP, at which point there appears to be a sharp reduction in the rate of growth.  As one might guess, this conclusion attracted a good deal of attention given the implications for fiscal policy decisions and the stakes in stabilizing debt (e.g., Paul Ryan cited it when framing his case for the GOP budget). Critiques have engaged issues ranging from coding errors (acknowledged by the authors) to the direction of causality.

The debate is by no means over and it may prove of some interest as the budget battles heat up and policymakers turn their attention to the vexing issue of entitlement reform. For a recent installment in the discussion over the growth-debt relationship, see Martin Wolf’s column (“Austerity loses an article of faith”) in the Financial Times.

2 thoughts on “Debt and Growth: The Politics of Ideas

  1. Most Austerity types pull ther beliefs more from a religous foundation than they do from actual empirical studies. So, an empirical study proving or disproving their beliefs will be seized up or dismissed outright accordingly. None of that will change. Epiphanies of error are rare among policymakers.

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