Morning adventures through The Conscience of a Liberal. Follow me down the rabbit hole for a moment, will you?
Piece 1: “What is Ken Rogoff Talking About?”
This is from this morning. Krugman is upset with Rogoff’s piece in the Financial Times (which I have yet to read) because he find Rogoff’s work with Carmen Rinehart on debt/growth questionable and because he feels he was mischaracterized as a Keynesian. Let’s put the Keynesian stuff aside: I was interested in why Krugman finds the debt research questionable, because Rinehart & Rogoff’s finding that a 90% debt/GDP ratio correlated to slower growth seemed very interesting to me and is getting widely cited. Fortunately, Krugman linked to
Piece 2: “Bad Analysis At The Deficit Commission”
Krugman reiterates in this piece, back from May 27, that he thinks the data is bad. He justifies this by saying the period in US history when debt/GDP was above 90% was after WWII when the workforce was demobilizing, women were going back to being housewives, etc. I think that’s an interesting point. He also says this:
And I suspect that much of the rest of their result reflects reverse causation: Japan had low debt and fast growth before the 90s, high debt and slow growth since, but surely we believe that Japan’s financial crisis is what both slowed growth and increased debt; similarly, the onset of Eurosclerosis is what led both to slowing growth and higher debt in Europe. And here’s the thing: Reinhart and Rogoff have not, as far as I can tell, made any effort to disentangle the causation here.
VERY interesting. Japan is definitely the glaring counterexample to the thesis. Which leads up to
Piece 3: “Debt And Transfiguration”
Here Krugman lauds the work on debt crises that Rinehart & Rogoff have done, although he expresses skepticism about the 90% debt/GDP effects, again:
What I think I’m seeing, although I haven’t tested this carefully, is that the causal relationship largely runs from growth to debt rather than the other way around. That is, it’s not so much that bad things happen to growth when debt is high, it’s that bad things happen to debt when growth is low.
And now it all makes sense. Krugman is thinking that a great deal of the problem is that in fact, low growth causes problems for high debt/GDP ratios. If I recall correctly, however, growth in the US right now is anaemic, possibly about to be negative again. Our debt/GDP ratio is at or above the 90% threshold. I therefore, using Krugman’s analysis, see no reason for him to be so doveish on the debt problem, regardless of the causal direction.
**update: Krugman has expounded upon his previous statements this morning here. He seems to be asking Rogoff to outline what spending cuts, as a staunch austerity supporter, he would make. I agree with Krugman that he should be providing solutions if he sees a genuine problem. Krugman seems to overstep his previous position though by saying that the 90% threshold is just bad analysis, rather than reverse causation. Interesting, and typically Krugman (i.e. inconsistent)