Oh dear

Ken Rogoff and Carmen Reinhart have bad new for everyone.

First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half.

Crowding out really does happen.

It is possible to borrow so much that government borrowing crowds out private leading to a fall in the growth rate.

And yes, we\’re about to borrow that much.

No, it isn\’t all to do with the financial crisis: the structural deficit is as much to blame.

Further, do note that this isn\’t the result of some contentious model, nor of any particular set of ideological filters- It\’s an empirical study: what has happened through time in such situations.

Yes, we\’re fucked. Thanks Gordo.

Yes, we do have to cut the deficit and soon. No, we cannot simply borrow our way out of this.

1 thought on “Oh dear”

  1. For alleged economists, they’re missing a pretty obvious point: times when debt goes above 90% of GDP tend to be times when Bad Shit has gone down. Since Bad Shit going down also tends to depress economic growth, the entire argument collapses.

    Tim adds: No, I’ve got the book. They both acknowledge that and attempt to account for it.

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