The Relationship Between Debt and Growth Conservatives think high and rising debt depresses growth toward zero, if not pushing it negative. MMTers think high and rising debt need not matter until jerks opposing it create problems. Rogoff and Reinhart found high debt very mildly correlated with slightly slower growth. When their data were corrected, within the typical range, the correlation went very slightly the other way. Inconclusive at best. We do know mild inflation is positively correlated to a bit better growth. Conservatives are clearly way off and simply want to shrink government. Toward that end, they will say what they think sounds best. Honestly is not their hallmark. In truth, R &R have emphasised the possible bi-directional causality between debt and growth. They argue that high debt may lead to higher taxes, lower government expenditure or both, each of which is harmful for economic growth, while on the other hand periods of low growth may lead to high deficits and the accumulation of debt. Using vector autoregressive (VAR) dynamic model which allow for impacts back and forth b etween the variables and taking panel data from 20 OECD countries over a period of 55 years, Finnish researchers find conclude that there is little evidence for a negative long-run effect of sovereign debt on economic growth. They note their findings are consistent with recent studies applying different methods, such as those of Panizza and Presbitero (2013), as well as those of Kimball and Wang (2013). Niether pair of researchers could find even a shred of evidence in the panel data for a negative effect of government debt on growth”. Conservatives have gotten it all wrong. This is strong support for those advocating the tenents of MMT.
Posted on: Mon, 26 May 2014 22:42:49 +0000
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