How Is It Silly to Ask If Higher Deficits Will Have a Negative Impact on Growth?

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Wednesday, 05 June 2013 05:13

Clive Crook told readers in a Bloomberg column that:

"It’s silly to ask whether high public debt causes lower growth or vice versa as though it must be one or the other. Almost certainly, both are true. This reinforces the case for fiscal consolidation as the recovery strengthens -- not just to restore fiscal room for maneuver but also to support longer-term growth."

Both parts of this statement are close to ridiculous. How do we know that higher debt everywhere and always leads to slower growth; because Clive Crook asserts it? What is the logic? In the prior paragraph Crook gave the traditional crowding out story, with high interest rates crowding out investment and other spending, but in the sort of severe slump that we are now seeing crowding out is not an issue. So how do we know that higher debt will slow growth?

Furthermore, Crook apparently has never heard of a balance sheet. If there is a curse of debt, then all countries (the United States in particular) have an enormous amount of assets (e.g. land, fishing rights, carbon emission permits) that can be sold to reduce debt. Since he claims that debt has a negative impact on growth it would be possible to avoid this negative impact through a sale of assets that would reduce the debt.

But the real absurdity is Crook's blanket assertion that "it is silly to ask." Let's go a step further, it is unbelievably silly not just to ask, but to try to quantify. Suppose that debt does indeed have a negative impact on growth and for some bizarre reason we can never sell assets. In order for this to be relevant to policy we have to know how much.

The original Excel spreadsheet error cliff implied a growth penalty of more than 1.0 percentage point for having debt-to-GDP ratios in excess of 90 percent. That would be a powerful argument against allowing our debt to rise above this level. But now that the Reinhart-Rogoff debt cliff has been destroyed by accurate arithmetic, we don't know the size of the growth penalty from high debt, even assuming that it is not zero.

Suppose that the penalty is 0.01 percentage point. Would this be a strong argument against policies that might quickly employ millions of workers? Probably not in most people's books, but hey, serious people like Clive Crook says it's silly to even ask such questions.

 

Note: "Crook" is now correctly spelled.