Seeking Alpha

"Interest rates can change like the weather. Debt levels ... can't be brought down quickly,"...

"Interest rates can change like the weather. Debt levels ... can't be brought down quickly," write Reinhart and Rogofff, dismissing arguments that low servicing costs mean debt isn't an issue (as Italy is finding out). Despite "prominent intellectuals" arguing otherwise, the empirical evidence shows strong correlation between large government debt and low growth.
Comments (6)
  • Sheik Rattle Enroll
    , contributor
    Comments (583) | Send Message
     
    Since both higher taxes and lower debt are correlated with higher GDP growth, the solution seems obvious.
    14 Jul 2011, 05:23 PM Reply Like
  • Andrew Vickers
    , contributor
    Comments (32) | Send Message
     
    Because correlation definitely implies causation. We wouldn't want to norm for other factors or anything.
    14 Jul 2011, 05:48 PM Reply Like
  • Sheik Rattle Enroll
    , contributor
    Comments (583) | Send Message
     
    You seem much more up on your statistics than me, so perhaps you have some data disproving a causal link that you'd like to share?

     

    The major fact here to correct for seems debt levels, but since higher taxes are also correlated with lower debt it'll be tricky, no?
    14 Jul 2011, 07:06 PM Reply Like
  • Andrew Vickers
    , contributor
    Comments (32) | Send Message
     
    Does lower debt cause higher growth or does higher growth lead to lower debt levels?

     

    When the economy is going strong, government revenues rise, government expenses (the so called automatic stabilizers) fall, and GDP growth expands faster than the debt load, causing debt as a percentage of GDP to decline.

     

    Following proper fiscal discipline, you actually should raise taxes in response to good economic conditions and cut them during times of weakness. Government is notoriously bad about actually doing this, but in a properly managed economy you would expect to see tax hikes during boom times and cuts as the economy began to soften. Thus, causation should be going in the opposite direction. (But it doesn't because ideology drives policy.)

     

    I am unmoved by the charts that attempt to show the correlation between tax burden and GDP growth over the decades. The result is a mixed bag, probably because it's a relatively minor contributor, easily overwhelmed by the more important macroeconomic forces of the day.

     

    Government uses the tax code for social engineering. They try to influence behavior with it and pick the winners and losers in many industries. It's certainly very influential in both consumer and corporate behavior, but that still doesn't mean it's overwhelms the more immediate economic forces of the day, i.e., oil embargoes, bank crashes, market crashes, currencies crises and contagion, the emergence of globalisation, the emergence of the information economy, wars and conscription, the end of the gold standard, trade liberalization, monetary unions, anti-discrimination and corruption laws, insurance reforms, changes in civil and criminal liabilities, changes in property laws, security laws, the BRICs & EAGLES etc. There is no way to see the affect of tax burdens on GDP growth "ceteris paribus" because everything else is never the same in a world in which global forces, national economies, and individual behavior evolve rapidly. Exactly how far back in history is it appropriate to look for these correlations where we can claim that the results took place in an economy structurally similar to our own?

     

    Really, I think it would be far more appropriate to discuss structural reforms to Medicare and Social Security with the aim of making them sustainable [and even take another look at financial regulatory reform] rather than to fixate on the current debt level. The current debate is partial measures for a very temporary fix. It's time for our leaders to man up and address the structural problems in the economy.
    14 Jul 2011, 08:39 PM Reply Like
  • tjohn1
    , contributor
    Comments (152) | Send Message
     
    Did not Keynes Guru of all our great economists preach deficit spending and spending your way out of recession to prosperity? Many of the Presidents' Economic Advisers culled from prestigious economic faculties belonged to this school. Was not Galbraith a Keynesian? And so many Nobel prize winners in Economics were Keynesians? Is economics arts or sciences?. Or is it witchcraft? God bless our intellectuals!
    14 Jul 2011, 05:38 PM Reply Like
  • WMARKW
    , contributor
    Comments (10252) | Send Message
     
    Having a BA in Economics - when we got to econometrics - I can truly testify it's.......witchcraft.
    15 Jul 2011, 12:05 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector

Next headline on your portfolio:

|