A dose of reality for the dismal science: A casual perusal of 20th-century economic history, let alone more rigorous econometric analysis, turns up multiyear periods in the UK and US following the second world war, and in Belgium, Italy, and Japan in the past 20 years, when public debt was greater than 90 per cent of GDP but nothing much happened. Either stagnation in economies led to slowly rising debt levels, as in Italy or Japan of late, or growth returned and debt levels declined, as in the UK and US in the 1950s. The latter two escaped the black hole of debt without an austerity rocket booster…. [S]low growth is at least as much the cause of high debt as high debt causes growth to slow – which if you stop to think about it, as some of us did before this week, makes more sense. The current UK economy is exhibit A for such a dynamic…. On the other hand, public debt is sometimes incurred by spending on constructive things with a positive return, such as infrastructure and education. So it is common sense that slow growth is always bad for debt accumulation, but not all debt accumulation is bad for growth. Thus, the causality runs more dependably from growth to debt than vice versa….
[T]here will always be some willing economist who can play with the data to provide a credible-seeming study to support any given politically influential point of view. This, however, is far too defeatist, if not craven, a conclusion to draw. Yes, I have some scars from having had to fight policy battles over and over – against spurious claims about expansionary budget consolidations, low or zero fiscal multipliers and the imminent threat of inflation during recession. I have heard claims from the 1930s repeated in Japan in 1999, in Britain in 2010, and again in the euro area today.
Certainly, academics who oversell their conclusions to get their lines into a speech or to come up with a rule that can be named after them can become disproportionately influential. And the academic establishment does not help matters by encouraging the production of new and counter-intuitive results… disincentivises the replication and empirical testing of previously published work. Yet, eventually, the truth will out…. Every time that the truth does emerge from the data, a few more researchers and officials find something lasting. This process of intellectual attrition took a long while to convince policy makers that trade protectionism is harmful, and that adherence to the gold standard is ill-advised. But we have now reached a state of public debate where only the obviously self-interested advocate the first, and only the obviously loony defend the second. Perhaps, as the mistakes of the current UK and eurozone economic leaderships become more evident, discussed, and analysed, similar progress will be made in limiting policy discussion to the more reasonable options.
It is a victory for common sense and good policy that the International Monetary Fund has publicly decided to reverse its past mistakes and come out clearly for sensible fiscal approaches – not least recognising the impact on growth of cutting the deficit and that reducing public debt is a task that should primarily occur once countries are out of recession…. Such moderation will not suit many of those who seized upon the event-horizon hypothesis – that result’s attraction was that it suggested a crisis was around the corner as a spur to consolidation. But let us celebrate rather than mourn what this re-evaluation of the evidence demonstrates, even though most already should have known it…. [I]t is not worth provoking a crisis to forestall a crisis that is unlikely to come…