Media Briefings

LINKS BETWEEN DEBT AND GROWTH

  • Published Date: April 2014

LINKS BETWEEN DEBT AND GROWTH: New historical and cross-country evidence of the dangers of a ‘one size fits all’ approach

 

There is scant evidence of a common turning point beyond which public debt’s detrimental impact on economic growth notably increases. Nor is there convincing proof that austerity works. These are the central findings of two new studies by Dr Markus Eberhardt and Andrea Presbitero, to be presented at the Royal Economic Society’s 2014 annual conference.

 

The researchers examine data on total public debt for 105 developing, emerging and developed economies between 1972 and 2009. They also examine two centuries’ worth of data for the UK, the United States, Sweden and Japan. Among the findings:

 

·          There is weak evidence that nations with higher average debt-to-GDP ratios are likely to experience a negative effect on long-term growth performance.

 

·          But there is no evidence that a debt threshold common to all countries – Reinhart and Rogoff’s suggested 90%, for example – triggers a systematic shift.

 

·          The debt-growth relationship varies across nations.

 

Dr Eberhardt comments:

 

‘The most important implication of our work is that there isn’t a ‘one size fits all’ answer for the links between debt and growth.

 

‘It therefore follows that policies for one country might be misguided if applied in another. Such an approach is at best misleading and possibly even counterproductive.’

 

He adds:

 

‘The reality is that some policy-makers have chosen to use Reinhart and Rogoff’s research to help champion pro-austerity measures.

 

‘The bottom line, as our research shows, is that we still don’t have convincing proof that austerity works – and it’s dangerous for policy-makers to pretend otherwise.’

 

More…

 

New research into the links between debt and growth has cast fresh doubt on a controversial study that has become a cornerstone of post-crisis economic policy.

 

The UK and US governments are among those to have cited Carmen Reinhart and Kenneth Rogoff’s work to help justify continued austerity measures.

 

The Harvard economists have argued that there is a common turning point beyond which public debt’s detrimental impact on economic growth notably increases.

 

But there has been mounting criticism from elsewhere in academia of their landmark paper, entitled ‘Growth in a Time of Debt’, and the research literature that supports it.

 

Now two studies carried out in the UK have reignited the debate by suggesting the shared ‘tipping point’ central to Reinhart and Rogoff’s findings does not exist.

 

The authors say their conclusions raise important questions about how some policy-makers choose to use – and perhaps even abuse – research by economists.

 

Dr Markus Eberhardt, of the Nottingham School of Economics, said: ‘A key conviction in policy circles in recent years has been the notion that ‘debt is dangerous.’

 

‘In the UK, for example, the Chancellor has spoken of the need to fix what he called ‘the addiction to debt that got this country into this mess in the first place’.’

 

‘In essence, the message is that austerity works. But how can we be sure of that if it turns out that the causality that’s routinely used to justify it simply isn’t there?’

 

Dr Eberhardt and his co-author Andrea Presbitero examined data on total public debt for 105 developing, emerging and developed economies between the years 1972 and 2009.

 

They found ‘tentative’ evidence that nations with higher average debt-to-GDP ratios are likely to experience a negative effect on long-term growth performance.

 

But they found no evidence that a debt threshold common to all countries – Reinhart and Rogoff’s suggested 90%, for example – triggers a systematic shift.

 

A second study, which examined two centuries’ worth of data for the UK, the United States, Sweden and Japan, also showed the debt-growth relationship varies across nations.

 

Dr Eberhardt, a lecturer in economics, said: ‘The most important implication of our work is that there isn’t a ‘one size fits all’ answer for the links between debt and growth.

 

‘It therefore follows that policies for one country might be misguided if applied in another. Such an approach is at best misleading and possibly even counterproductive.’

 

Last year Reinhardt and Rogoff published a formal correction addressing certain criticisms of their research, although they continue to stand by their findings.

 

But Dr Eberhardt believes the ‘bigger picture’ is in danger of being overlooked as the academic firestorm continues to rage and the pair remains firmly at its heart.

 

He said: ‘The trouble is that the sheer ferocity of the academic debate has somehow served to obscure the very grave reservations that are being expressed.’

 

‘Reinhart and Rogoff are under attack from all sides, yet the fact that their empirical analysis remains a given in some political quarters goes largely unnoticed.’

 

‘The reality is that some policy-makers have chosen to use this research, along with the literature cited in its support, to help champion pro-austerity measures.

 

‘It’s become a means of painting the debt-growth conundrum as a fait accompli, as if economists are lab-coat-wearing scientists who deal in cast-iron certainties.’

 

‘So far, despite all the controversy, there hasn’t been even a hint from policy-makers that some sort of reconsideration might be in order. That can’t be right.

 

‘The bottom line, as our research shows, is that we still don’t have convincing proof that austerity works – and it’s dangerous for policy-makers to pretend otherwise.’

 

ENDS

 

 

Notes for editors:

‘Does austerity really work?’ by Dr Markus Eberhardt and Andrea Presbitero

 

For further information, contact:

Romesh Vaitilingam: romesh@vaitilingam.com, +44 7768 661095