“Does Debt Matter?” is the question posed by The International Economy to 20 commentators: “The recent scrutiny of the popularized version of the Rogoff-Reinhart thesis (that growth plummets when debt exceeds 90 percent of GDP) makes clear there are no simple formulas for determining the risks in the level of a nation’s debt. …Can a realistic guide be fashioned for determining whether a nation’s debt has reached a danger zone? Or are countries from here on expected to pursue fiscal reforms only if and when a crisis sets in?”
My response is yes, debt matters.
I don’t think I know of anyone who believes that a high level of debt is without adverse consequences for a country. There is no magic threshold in the ratio of debt to GDP, 90% or otherwise, above which the economy falls off a cliff. But if the debt/GDP ratio is high, and especially if the country’s interest rate is also high relative to its expected future growth rate, then the economy is at risk. One risk is that if interest rates rise or growth falls, the economy will slip onto an explosive debt path, where the debt/GDP ratio rises without limit. In the event of such a debt trap, the government may have no choice but to undertake a painful fiscal contraction, even though that will worsen the recession. (The resulting fall in output can even cause a further jump in the debt/output ratio, as it has in the periphery members of the eurozone over the last few years).
None of that means that austerity in the midst of a recession is a good idea. Reinhart and Rogoff never said it was, either in their research or in their policy advice. Rather, as Keynes said, the time for fiscal austerity is during the boom, not during the recession. Indeed, a good reason to reduce the debt/GDP ratio during a boom is precisely to create the space for fiscal stimulus during a downturn.
No, countries should not be told “to pursue fiscal reforms only if and when a crisis sets in.” Rather, high-debt countries should take advantage of periods of growth to eliminate budget deficits before a crisis sets in, so that they do not find themselves in a debt trap. The time to fix the hole in the roof is when the sun is shining. Most European countries failed to take advantage of the growth years 2002-2007, to strengthen their budgets, and are now paying the price. The Greeks spectacularly failed to do so, with the result that they have had to go up on the roof to attempt to fix the hole during a thunderstorm, a task that is unpleasant, difficult, dangerous – and probably impossible.
If you want to identify some research that has misled politicians, go for the papers suggesting that fiscal contraction is not contractionary and that it may even be expansionary. It is true that sometimes a country may have no alternative to fiscal contraction; but that does not mean it is expansionary, especially if the currency cannot be devalued to stimulate exports.
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
The United States also failed to take advantage of the growth years 2002-07 to run budget surpluses. But fortunately our situation is completely different from Greece’s: our creditors are happy to hold dollar bonds, even at rock-bottom interest rates. They are not imposing on us short-term recession-inducing fiscal austerity. We should not impose it on ourselves while the economy is still weak. Instead, we should take steps now that will restore fiscal discipline in the future.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
Many countries’ recent experiences show that boosting manufacturing employment is like chasing a fast-receding target. Automation and skill-biased technology have made it extremely unlikely that manufacturing can be the labor-absorbing activity it once was, which means that the future of “good jobs” must be created in services.
shows why policies to boost employment in the twenty-first century ultimately must focus on services.
Minxin Pei
doubts China’s government is willing to do what is needed to restore growth, describes the low-tech approaches taken by the country’s vast security apparatus, considers the Chinese social-credit system’s repressive potential, and more.
For the last several years, world leaders have made big promises and laid out bold plans to mitigate the climate crisis and help the neediest countries adapt. At this year's World Bank/IMF Spring Meetings, they must demonstrate that they can fulfill these promises, rather than simply touting new ones.
think policymakers need to get four things right to shore up the credibility of the international system.
Log in/Register
Please log in or register to continue. Registration is free and requires only your email address.
“Does Debt Matter?” is the question posed by The International Economy to 20 commentators: “The recent scrutiny of the popularized version of the Rogoff-Reinhart thesis (that growth plummets when debt exceeds 90 percent of GDP) makes clear there are no simple formulas for determining the risks in the level of a nation’s debt. …Can a realistic guide be fashioned for determining whether a nation’s debt has reached a danger zone? Or are countries from here on expected to pursue fiscal reforms only if and when a crisis sets in?”
My response is yes, debt matters.
I don’t think I know of anyone who believes that a high level of debt is without adverse consequences for a country. There is no magic threshold in the ratio of debt to GDP, 90% or otherwise, above which the economy falls off a cliff. But if the debt/GDP ratio is high, and especially if the country’s interest rate is also high relative to its expected future growth rate, then the economy is at risk. One risk is that if interest rates rise or growth falls, the economy will slip onto an explosive debt path, where the debt/GDP ratio rises without limit. In the event of such a debt trap, the government may have no choice but to undertake a painful fiscal contraction, even though that will worsen the recession. (The resulting fall in output can even cause a further jump in the debt/output ratio, as it has in the periphery members of the eurozone over the last few years).
None of that means that austerity in the midst of a recession is a good idea. Reinhart and Rogoff never said it was, either in their research or in their policy advice. Rather, as Keynes said, the time for fiscal austerity is during the boom, not during the recession. Indeed, a good reason to reduce the debt/GDP ratio during a boom is precisely to create the space for fiscal stimulus during a downturn.
No, countries should not be told “to pursue fiscal reforms only if and when a crisis sets in.” Rather, high-debt countries should take advantage of periods of growth to eliminate budget deficits before a crisis sets in, so that they do not find themselves in a debt trap. The time to fix the hole in the roof is when the sun is shining. Most European countries failed to take advantage of the growth years 2002-2007, to strengthen their budgets, and are now paying the price. The Greeks spectacularly failed to do so, with the result that they have had to go up on the roof to attempt to fix the hole during a thunderstorm, a task that is unpleasant, difficult, dangerous – and probably impossible.
If you want to identify some research that has misled politicians, go for the papers suggesting that fiscal contraction is not contractionary and that it may even be expansionary. It is true that sometimes a country may have no alternative to fiscal contraction; but that does not mean it is expansionary, especially if the currency cannot be devalued to stimulate exports.
Subscribe to PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
The United States also failed to take advantage of the growth years 2002-07 to run budget surpluses. But fortunately our situation is completely different from Greece’s: our creditors are happy to hold dollar bonds, even at rock-bottom interest rates. They are not imposing on us short-term recession-inducing fiscal austerity. We should not impose it on ourselves while the economy is still weak. Instead, we should take steps now that will restore fiscal discipline in the future.
For all 20 responses to the “Does Debt Matter?” question, see the symposium in the spring 2013 issue of The International Economy.