Debt and Economic growth

[N3bu]

So, recently I've noticed an up-tick in Economically related opinion pieces getting involved in this long running mystery of how to fix the economy and in particular in the role of debt. Personally I've always backed the idea that while debt can be destructive (in large amounts relative to the size of the Economy) the US shouldn't be in panic mode now of all times.

In the past debt and growth have been intrinsically linked in theory, with debt level effecting how well growth works, in particular the now (in?)famous 90% limit which has yet to withstand criticism. This is obviously based on the idea that the more in debt your economy the more resources the economy has to divert to pay the cost of debt. It should be of note that rarely do Economists warn of this mythical default created from being crushed under the weight of death that many popular commentators like the discuss (probably 'cause it's easier to sell).

Now however in several recent articles (not all good sources for sure) I've read there seems to indicate to me that opinion is changing and that perhaps debt is less a driver and more or less another indicator.

The argument goes that the link between debt and growth is through society. The society that can produce economic growth efficiently, with innovation and good stable business conditions tend to also be the ones with less debt (by nature of the kind of society they are). On the other hand a politically divided country lacking in both innovation and stability can neither achieve growth and must continue to turn to debt to finance. The implication being that a "sick" country cannot just simply stop spending to fix it's problems.

What is EDP's take on this idea that debt is not the driver, but merely another indicator of a greater economic problem overall?

[Wraith of Azrael]

Ehh debt isn't so much of a driver as it is a deterrent of growth.

The more debt a country has the less willing others are to put money into the economy and the greater the crowding out effect is.

The greater the surplus a country has the more willing others are to put money into the economy and the greater the crowding in effect is.

Debt just needs to be lowered because its acting as a deterrent for growth is all.

Eliminating the debt won't solve the problems but it will at least help.

[N3bu]

Wraith of Azrael

Ehh debt isn't so much of a driver as it is a deterrent of growth.

The more debt a country has the less willing others are to put money into the economy and the greater the crowding out effect is.

The greater the surplus a country has the more willing others are to put money into the economy and the greater the crowding in effect is.

Debt just needs to be lowered because its acting as a deterrent for growth is all.

Eliminating the debt won't solve the problems but it will at least help.

That's the old school thought at least.. but what do you think?

Economics is usually a school in flux since it often has to do with human action phenomena in a manner not entirely grounded in the scientific method. So the intent of this thread is less about what Economics used to say was true, and more about the shifting model within which we consider debt and what could be the new model.

My 'Theory'

For example, personally I feel the model of debt effecting growth is untested, or at least untested in a manner with which we can say for sure that X amount of debt will for sure hinder Economic growth. This is because across a couple hundred countries and economies it seems the relationship between debt and growth doesn't seem causative, or at least not strongly causative and it certainly doesn't seem to fit and strict linear pattern.

So if we can take that debt does not have a strong causative relationship with growth then what is the correlation about? It seems to make sense, to me at least, that there are likely social conditions present that both prevent growth and drive up debt. A country for example that has a difficult time deriving growth with innovative and efficient industry will more likely have to turn to debt financing to meet it's goals, especially as the economy dips. An economy that however has a robust, stable, efficient and innovative industry that continues to perform well will often find it easier to pay back any debts it ever has to occur.

As for the underlying social problems, I think it might have to do with social direction and a de-emphasis on the hard sciences, at least in the first world. It's become increasingly obvious for example that the first world cannot compete in labour intensive industries, free trade or not, the temporary solution has been to, in addition to refocusing to the services sector, to focus on more high-tech high-end manufacturing. This was very do-able 40-50 years ago when countries like America reaped the benefits from the tension of the cold war and put a lot of money into developing new technologies like rocketry, computerisation, and miniaturisation. It in many ways influenced education to focus on those areas creating a significant resources of scientific and engineering intellect that could keep up the high-tech evolving economy.

in that respect I think the focus (or resurgence?) of the liberal-arts of the past 30 years has been a bit of a disadvantage, economically. I think this also might tie in with the constant complaints of degradation in the education systems amongst the first world. That's why personally I feel if the first world Economy is going to grow in any real way 20-30 years from now there needs to be significant investment in education.

What about you? What do you think about the very idea that debt is really only (effectively) linked to growth through a third variable?

[Silvia Crow]

Now, in no way am I clever at economics (I slept through most of my economics class in high school) but I just don't get something about the whole "get out of debt" issue.

People are saying that we need to spend MORE money to get out of debt. Now, again, I'm not clever or very knowledgeable regarding this, but at least to me, logic dictates that you should spend less to get out of debt. Buckle down, cut a few programs/expenses, stop overspending for s**t and only spend money on upkeep stuff.

And yet, people tell me that this is the wrong way to go about it. Why is that?

[Complex Systems]

First off, thanks for not directly referencing the Reinhart and Rogoff paper fiasco. Otherwise I'd be raging all over the place.

Secondly, the issue I have with the "debt causes economic slowdown" arguments is that they don't seem to be that micro-founded. There is, from growth accounting, some measure of a log-linear relationship between growing debt and decreasing economic growth. But, that's in relation to panel data and long run growth trends using data that might date back to the 70's. ******** off, macro Time series. crying

[Wraith of Azrael]

N3bu

That's the old school thought at least.. but what do you think?

Economics is usually a school in flux since it often has to do with human action phenomena in a manner not entirely grounded in the scientific method. So the intent of this thread is less about what Economics used to say was true, and more about the shifting model within which we consider debt and what could be the new model.


What about you? What do you think about the very idea that debt is really only (effectively) linked to growth through a third variable?

I'd consider it valid, makes logical sense.

I think the issue of debt depends entirely on how the economy of a country is organized. A country which has debt that is held predominately by the people of a country and mainly has domestic investment as opposed to foreign investment has less to fear from debt than one which has a large amount of foreign investment and whose debt is held predominately by foreigners. The only thing that I could see for them to have a problem with is possibly the affects of currency devaluation but even then this may be offset by an increase in foreign trade so who really knows....

I will say that a country which has plenty of foreign investment and has most of its debt held by foreigners would be best off with a low amount of debt.

[Heimdalr]

Debt is money. Without debt, there would be no money. Yes I have ingested a bottle of cognac yes I am unreliable in professional matters. But the more money is to go around the more debt. That's entirely symptomatic. I don't care, as long as the debt does not serve to fund African warlords or terrorist organizations worldwide. Problem being they usually do.

[Wendigo]

Y'ask me, the debt people ought to be concerned about when it comes to economic growth is the kind taken on by individuals and households. When you're in debt, it's harder to get on sound financial footing.

[azulmagia]

Complex Systems

First off, thanks for not directly referencing the Reinhart and Rogoff paper fiasco. Otherwise I'd be raging all over the place.

Why go so far as rage? I mean it sucks, but...

Quote:

Secondly, the issue I have with the "debt causes economic slowdown" arguments is that they don't seem to be that micro-founded.

Insistence on micro-foundations, how quaint!

[Michael Noire]

The first step to overcoming the economic problem of debt is establishing a Jubilee clock for the most positive debt relief possible. That would be student loans, likely followed by medical loans, then home loans. Somewhere toward the bottom would be credit card debts and business loans. Somewhere in the middle might be autoloans and debts incurred due to layoff such as your factory downsizing or being bought by a foreign company and then liquidated.

We begin with the premise that education is a necessity and that culturally we have an expectation for people to try to get a good education. This is a form of cultural indoctrination that is also sanctioned behavior (the act of going to school) and the prices of education have been inflating faster than is realistic, producing a system of price gouging and loan sharking habits rivaling the mafia.

We then move into people who cannot afford to pay for that new heart surgery or their child's leukemia therapy. We have to recognize that people are not entirely responsible for decisions made under duress and must also acknowledge the fact that many medical expenses are artificially inflated and in fact only 2nd in disproportionate price hikes to Student loans. Telling someone who is dying that they have to bankrupt themselves and their family so that someone else can drive a Mercedes to his Beach house is a failure of society and just short of armed robbery or cannibalism.

A person who makes good decisions and then has their lives destroyed by the bad decisions of others, such as a change in mortgage rates, or a loss of job due to no fault of their own should not be held to the same standards of loans that a person investing in a pyramid scheme to make themselves rich enough to swim in swimming pools full of jello might be expecting. Bad business practices should be punished, but we should do everything in our power as a society to shield the innocent.

[Complex Systems]

azulmagia

Complex Systems

First off, thanks for not directly referencing the Reinhart and Rogoff paper fiasco. Otherwise I'd be raging all over the place.

Why go so far as rage? I mean it sucks, but...

Quote:

Secondly, the issue I have with the "debt causes economic slowdown" arguments is that they don't seem to be that micro-founded.

Insistence on micro-foundations, how quaint!

I'd rage because I feel like the internet is beating it to death.A a non-peer reviewed papers and proceedings paper was grabbed onto by politicians to further their goals, and later found to have mistakes? LE GASP. Do you have any idea how often this happens at any particular think tank, which is really what the original 2010 AEA papers and proceedings article was akin to, and how the authors have treated it.

Secondly, if we're asserting a link between debt and growth, we can assume the null until two things, (1) a large correlation between the two has been found, which I don't think it has. Or (2) theory suggests a mechanism by which high debt, usually through some form of micro-foundations and all else being equal, causes growth to slow, which I also don't think it has. It's not an insistence on microfoundations, but it's a way of trying to ascertain causality of relatively small sample size time series.

[Michael Noire]

one of the problems of our world is social acceptance of the idea of an injust world. What's the point of having laws and government if you are complacent in the infringement of justice? Laws were created to create a safety net for justice when nature failed. Laws should be abolished or ignored where they produce injustice, and one of the greatest injustices is believing that "s**t happens" and "it can't be helped" and "life isn't fair". When you become complacent to the twisted nature of reality, it means you are embracing entropy as a substitute for anarchy. Acceptance of a lesser evil in exchange for overcoming a greater evil may seem like the prudent, easier choice, but it is still the wrong one.

[Cory Shallow]

Silvia Crow

Now, in no way am I clever at economics (I slept through most of my economics class in high school) but I just don't get something about the whole "get out of debt" issue.

People are saying that we need to spend MORE money to get out of debt. Now, again, I'm not clever or very knowledgeable regarding this, but at least to me, logic dictates that you should spend less to get out of debt. Buckle down, cut a few programs/expenses, stop overspending for s**t and only spend money on upkeep stuff.

And yet, people tell me that this is the wrong way to go about it. Why is that?

What's true about investment for one class of investors is not the same for another, but policymakers will try to sell one truth as another in order to serve their party's interests.
If a private company (with many dependents) is in danger of bankruptcy and it has liquid assets that are just sitting there not actually doing anything, sure, it makes sense to loosen up what's available to increase revenue and address the budget.
But to a public company or organization that investment process takes an entirely different avenue of expenditure. Its revenue is a seemingly endless trough, which justifies the padded expenses public entities tend to accumulate. If the money is always going to 'come', they're not going to manage it as efficiently as a firm (or individual) that has to make the money come.