Economic Argument for Austerity Based on Excel Error?

[Sheilbh]

As permanent?  What?

It can affect future generations just as much.

[Ideologue]

It's called investment.  As long as growth outpaces the interest paid on the debt, it doesn't matter.

What do you mean by the interest paid?  The rate?  The dollar amount.

The actual dollar amount, I think, in order to reduce the ratio--which is what you want to do with stimulus in the short-to-medium term. Obviously, in the long term, some austerian measures may be good.  Debt is not a good thing obviously, but depression is very much worse, is my point.

The formula is that you're OK as long as the growth rate is higher than the deficit as a % of GDP.  Then the denominator in debt/GDP is growing faster than the numerator.

Exactamundo.  But contractionary policy isn't going to reduce the debt/GDP ratio anyway.

And since austerity causes the exact opposite of growth, the debt/GDP ratio just gets worse, along with a lot of human suffering that will severely damage future generations--since future generations depend desperately upon the generation being devastated by austerity measures.  Or is it actually old people taking the pain in Spain, Greece, Europe in general and even America, sacrificing bravely for their children and grandchildren?  If so, why is it their children and grandchildren don't have jobs, will never buy houses, and will either choose not to have children of their own or raise them in squalor?

Very stirring.  Now who's going to lend Greece money?
[/quote]

The European Union, obviously, meaning in practice Germany.  They have the moral obligation to do so.  They took in a poor country, attempted an uplift and failed due to greed on either side.  As the adults, it's their responsibility.

[Ed Anger]

My kobolds would eat Ide in his inflationary economy.

[Admiral Yi]

The actual dollar amount, I think, in order to reduce the ratio--which is what you want to do with stimulus in the short-to-medium term. Obviously, in the long term, some austerian measures may be good.  Debt is not a good thing obviously, but depression is very much worse, is my point.

Growth is a rate, a dollar of interest is a dollar.  How can one be higher than the other?

[Ideologue]

Maybe I'm misspeaking.

If the rate of debt growth is lower than the rate of GDP growth, the ratio of debt/GDP will be lower than at T-0, even though the numerator will rise in absolute terms.  Rate/rate and absolute amount/absolute amount are different ways of expressing the same mathematical idea here.

[MadImmortalMan]

That's why measuring debt in terms of GDP is problematic.

[Sheilbh]

That's why measuring debt in terms of GDP is problematic.

Nonsense. It's the only meaningful way you can measure it.

[MadImmortalMan]

That's why measuring debt in terms of GDP is problematic.

Nonsense. It's the only meaningful way you can measure it.

Why?

[Admiral Yi]

Why?

Because the bigger your GDP, the easier it is to pay off a given amount of debt.

[MadImmortalMan]

Why?

Because the bigger your GDP, the easier it is to pay off a given amount of debt.

Yes. But a component of the thing you're measuring is going into the standard against which you're measuring it. Government spending is part of the GDP equation. So it will necessarily skew the debt to gdp ratio toward 100% in an amount relative to the total size of the public sector.

If Greece borrows a quadrillion euros this year and spends it, the Greek GDP will be over a quadrillion. And their debt to GDP ratio will go down to 99%.


In order to get a non-skewed number, it would be better to measure debt in a ratio with, say tax receipts.

[Admiral Yi]

Yes. But a component of the thing you're measuring is going into the standard against which you're measuring it. Government spending is part of the GDP equation. So it will necessarily skew the debt to gdp ratio toward 100% in an amount relative to the total size of the public sector.

If Greece borrows a quadrillion euros this year and spends it, the Greek GDP will be over a quadrillion. And their debt to GDP ratio will go down to 99%.


In order to get a non-skewed number, it would be better to measure debt in a ratio with, say tax receipts.

Well yeah, assuming no leakage through the external accounts.  Typically countries don't get to borrow an infinite multiple of GDP in a given year.

[MadImmortalMan]

Yeah, that wouldn't happen but it makes the math easy to understand. Some of these guys had been borrowing ten or fifteen percent of their GDP (spending included) annually. The skew is significant enough not to trust it at that level I think.

[The Minsky Moment]

Just to be clear, the original paper does not advocate austerity.

Correct.  It is not (pace thread title) an economic argument for austerity.  The authors aren't making any causal claim, as they note again in their response:

By the way, we are very careful in all our papers to speak of "association" and not "causality" since of course our 2009 book  THIS TIME IS DIFFERENT showed that debt explodes in the immediate aftermath of financial crises.  This is why we restrict attention to longer debt overhang periods in the JEP paper., though as noted there are only a very limited number of short ones.   

Others have taken the RR results out of context and attempted to make broader conclusions but not RR themselves.

[Berkut]

The answer to our problem of spending way too much money is surely to spend a lot more.

[Iormlund]

Very stirring.  Now who's going to lend Greece money?

We've been here before and the answer is still the same: that's where the ECB comes in.