Reinhart-Rogoff, Debt, and Assets

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Tuesday, 28 May 2013 04:15

Since folks seem to have difficulty understanding how assets can be relevant to the Reinhart-Rogoff debt kills growth story, I will give a concrete example. Brad Plumer had a piece this weekend in the Post that discussed the potential of a carbon tax to slow greenhouse gas emissions and raise revenue. He presents estimates that a $20 a ton tax would raise $1.2 trillion over the next decade.

Okay, at this point everyone should have heard of the idea of selling emissions permits as being roughly equivalent to a tax in terms of raising revenue and discouraging emissions. Suppose that we decided tomorrow to auction off permits that were issued in a number that was intended for carbon to be priced at $20 a ton. This should raise $1.2 trillion for the government, an amount equal to 7.5 percent of GDP. (I'm ignoring discounting to keep this simple, I'm trying to make a point. If we need more money we can make the permits good for 20 years.)

If we had crossed the Reinhart-Rogoff danger line of 90 percent, say with a debt-to-GDP ratio of 95 percent, this sale of permits would push us safely under the threshold with a debt-to-GDP ratio of 87.5 percent. If the Reinhart-Rogoff 90 percent cliff was real, how could anyone be opposed to this policy?

It would increase annual growth by something like 1.0 percentage point, while helping to save the planet. The cumulative gain to GDP would be somewhere in the neighborhood of $8 trillion or more than $100,000 in additional output for an average family of four.  

The United States has many other carbon permit sale option type policies available. If we believed in the Reinhart-Rogoff cliff, these would be the obvious answer as these asset sales would provide incredible growth dividends.

I'm not personally advocating such asset sales because I don't take the Reinhart-Rogoff cliff seriously. But any honest economist who does believe in the RR cliff should be highly vocal proponents of asset sales. (They are much easier politically than cutting Social Security and Medicare.)

So here's the perfect lie detector test for economists arguing the RR case. Are they pushing large scale asset sales?