Shiller: Debt and Delusion

Robert Shiller is less than impressed with Reinhart and Rogoff's warning that "when government debt exceeds 90% of GDP, countries suffer slower growth":

Debt and Delusion, by Robert J. Shiller, Commentary, Project Syndicate: Economists like to talk about thresholds that, if crossed, spell trouble. ... Consider, for example, the debt-to-GDP ratio..., debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. ...

If economists did not habitually annualize quarterly GDP data..., if they habitually decadalized GDP [i.e. used total GDP over 10 years as the standard measure] ..., Greece’s debt burden would be 15%. From the standpoint of Greece’s ability to pay, such units would be more relevant, since it doesn’t have to pay off its debts fully in one year (unless the crisis makes it impossible to refinance current debt). ... Most people never think about this when they react to the headline debt-to-GDP figure.

A paper written last year by Carmen Reinhart and Kenneth Rogoff ... found that when government debt exceeds 90% of GDP, countries suffer slower growth... But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily. They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category.

There is also the issue of reverse causality. Debt-to-GDP ratios tend to increase for countries that are in economic trouble. If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance. ...

The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

High unemployment also lowers long-run economic growth, but we aren't we putting nearly as much effort into that problem as we are into austerity. Where are the White House meetings with key Republican leaders over what to do about the unemployment problem? True, Republicans might not show up show up for such a meeting, but so what? Pictures of empty chairs at a meeting focused on helping the unemployed would send a strong message about what really counts for the GOP. Unfortunatley, Democrats seem to have forgotten about the unemployed as well -- right now all the chairs are empty -- and that sends a strong message as well.