Debt and Growth III
I’m going to try to make this post brief and comprehensible. It contains no information not in an earlier post but I delete a whole lot of distracting data.
The question is does the Reinhart Rogoff (hence R-R) data set on public debt and real GDP in 20 rich countries post WWII contain evidence that a debt to gdp ratio higher than 90% causes lower real GDP growth. My answer is no it does not contain any such evidence.
Note the very very low bar. I claim no evidence of a bad effect not just no evidence that 90% is a critical level at which additional debt becomes extremely bad for growth but no evidence of any effect on growth at all.
Why is my result different from almost everyon else’s (except for Dube’s) ? Well I take the very very first step to address causation — I run a regression including lagged real GDP growth. This is the first standard totally unconvincing way to try to determine causation from historical data. A significant estimated effect of debt would mean that debt “Granger causes” low growth where Granger cause is the English translation of post hoc ergo propter hoc.
the dependent variable is annual real GDP growth. The first coefficient is on the debt to gdp ratio in percent rounded down to 90 if it is over 90. The second coefficient — the coefficient of interest — is the ratio minus 90 if it is over 90 or zero if it is under 90. This coefficient is an estimate of the effect of further debt once debt has already reached 90% of GDP — exactly the effect of interest. l1drgdp is the one year lagged rate of real GDP growth. _cons is aconstant term.
The point is that the coefficient on debtgdpmin90 is actually very slightly positive. There is no evidence in the R-R data set that debt to GDP ratios greater than 90% are worse for growth than a debt ratio of 90%.
Here is the stata do file which generates the result. It uses the R-R data set as processed a bit by Herndon et al and available here
clear
use C:\rjw\Papers\Peri\RR-processed.dta
quietly tab Country,gen(count)
gen cntry = count1+2*count2+3*count3+4*count4+5*count5+6*count6 + 7*count7 + 8*count8+9*count9+10*count10+11*count11+12*count12+13*count13+14*count14+15*count15+16*count16+17*count17+18*count18+19*count19+20*count20
gen l1drgdp = dRGDP[_n-1] if cntry[_n-1]==cntry
gen debtgdpto90 = debtgdp + (90-debtgdp)*(debtgdp>90)
gen debtgdpmin90 = debtgdp-debtgdpto90
gen debtgdpto30 = debtgdp + (30-debtgdp)*(debtgdp>30)
gen debtgdpmin30 = debtgdp-debtgdpto30
reg dRGDP debtgdpto90 debtgdpmin90 l1drgdp
Look, the real world does not behave as statistics interpret or project.
The examples of this I am sure are well known to you and are too numerous to cite
The biggest issue I have with the above article is that increased debt can grow GDP until it doesn’t.
Its like Mark Twain supposedly said when asked how did you go bankrupt…slowly at first, then all the sudden.
Never mind facts and data. Dave Beard has a better understanding of the real world.
Possibly even better than – oh, say – Paul Krugman.
http://www.nytimes.com/2013/04/26/opinion/krugman-the-one-percents-solution.html?_r=0
Cheers!
JzB
”The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself. This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system.[4] Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production.
The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production.”
[Capital Vol. III Part V Chapter 27]