"Fix The Debt"? It Ain't Broken and Ain't a Threat To Growth

[boutons_deux]

How Much Unemployment Did Reinhart and Rogoff's Arithmetic Mistake Cause?

That's the question millions will be asking when they see the new paper by my friends at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.

There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting.

http://truth-out.org/news/item/15778...-mistake-cause

[boutons_deux]

11 Republicans Who Cited A Faulty Study To Push For Drastic Spending Cuts

Rep. Paul Ryan (R-WI): “Economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth and intensifies the risk of a debt-fueled economic crisis.” [6/23/2011]Sen. Jeff Sessions (R-AL): “Four major academic studies have shown that gross debt in excess of 90 percent of GDP results in weaker economic growth.” [3/14/2013]

Rep. Dave Camp (R-MI): “Independent economists have found that debt loads greater than 90 percent of GDP could result in the loss of up to a million jobs.” [2/15/2012]

Sen. Tom Coburn (R-OK): “If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know what’s coming. Every country that’s ever had a debt crisis and has printed money has ended up with an inflation problem.” [5/20/2012]

Sen. John Cornyn (R-TX): Well, I — let me ask you about Carmen Reinhart and Kenneth Rogoff have written a book covering 700 years — if I’m not mistaken — of fiscal crises and looked at the impact of — of large debt on economic growth. And they have opined that a debt that exceeds 20 percent — excuse me — 90 percent of the gross domestic product reduces economic growth by about 1 percent. Currently, our gross debt is 106 percent of GDP. And under the president’s proposal, gross debt would reach 97 percent of GDP in 2023. [4/12/2013]

Sen. Rob Portman (R-OH): “[RR] have shown that once a country’s debt burden reaches 90 percent of the economy, you have a significant downturn in economic growth.” [11/28/2011]

Sen. Orrin Hatch (R-UT): “Countries with debt above 90 percent of GDP have growth that is 1 percent below normal, resulting in a loss of 1 million jobs.” [6/29/2011]

Sen. John Thune (R-SD): “Carmen Reinhart and Kenneth Rogoff, have stated that debt in excess of 90 percent can cut our country’s economic growth rates in half. Washington’s policies of reckless spending have put America well beyond this point.” [1/6/2012]

Sen. Roger Wicker (R-MS): “[Reinhart and Rokoff] helps illustrate the lasting harm of high government debt. Their study of public debt in 44 countries revealed that debt levels exceeding 90 percent of GDP are associated with lower economic growth – declining by about 1 percent annually.” [9/10/2012]

Rep. Tom Price (R-GA): “I know from the Reinhart study that — that unless one gets below that 90 percent level and many of us believe it ought to be lower than that, but unless one gets below that, the economies don’t turn around.” [4/11/2013]

Rep. Jeb Hensarling (R-TX): If you look at the history of economies over the last 200 years when their debt exceeds 90 percent of GDP, they start to decline. That’s where we are in America today. [5/17/2012]

http://thinkprogress.org/economy/201...spending-cuts/

[boutons_deux]

what REALLY kills growth (see Europe esp UK), esp during, eg, the Banksters Great Depression, is pro-cyclical austerity, which is exactly what Ryan proposes, and we're beginning to see now and more in the couple months to come with the sequester austerity.

[Nbadan]

Another Democratic President, another projected surplus in debt..

Source: Bloomberg

The U.S. Treasury Department (USGG10YR) projected it will pay down debt this quarter for the first time since 2007 as tax receipts exceed forecasts and spending diminishes.

The pay-down in net marketable debt was estimated at $35 billion in the April-June period, compared with a projection three months ago for net borrowing of $103 billion, the department said in a statement today in Washington. Treasury officials also see net borrowing of $223 billion in the quarter starting July 1. The estimates set the stage for the department’s quarterly refunding announcement on May 1.

Congress has suspended the nation’s $16.4 trillion debt limit through May 18. Lawmakers will be debating proposals to raise the ceiling in the coming months to ward off the possibility of a U.S. default.

“Tax receipts have been stronger than expected and refunds have been lower because of concerns over the fiscal cliff,” Thomas Simons, a government debt economist at Jefferies LLC in New York, said. Simons predicted that “we will see lower borrowing estimates” in the future.

Read more: http://www.bloomberg.com/news/2013-0...s-quarter.html

[coyotes_geek]

The pay-down in net marketable debt was estimated at $35 billion in the April-June period

Treasury officials also see net borrowing of $223 billion in the quarter starting July 1

Fail.

[Nbadan]

They had a projected debt this quarter too, but that didn't happen..