Fiscal policy: Debt, growth and competing risks: CARMEN REINHART and Kenneth Rogoff have revived the debate over their work on debt and growth with an open letter to Paul Krugman. They accuse him of incivility, factual misstatements and general wrongness. On the first, he's guilty (but so are many economists, usefully). On the second, he is guilty of a lesser charge; Ms Reinhart and Mr Rogoff do seem to have made their data available as they turned it up, but they do not respond to charges that they were slow in making public their Excel spreadsheet, which is what allowed critics to understand what they had done and where they had gone wrong. On the third, Ms Reinhart and Mr Rogoff have swung and missed. They have retreated to the general position that a negative relationship exists between debt loads and growth. And on the matter of causality—which one might say is the crux of the debate—they can do no better than argue that the evidence is mixed.
But most of their letter can be described as an argument that, historically, high debt loads have been associated with various macroeconomic risks, and it is worth acting to minimise such risks. This is sensible. But… how do such risks stack up against other macroeconomic threats, and what is the best way to reduce debt risks?… Krugman emphasises, correctly I think, is that prolonged unemployment is a long-run fiscal threat. Joseph Gagnon makes the point nicely in a post responding to Tyler Cowen's discussion of whether American austerity has been self-defeating:
The problem is that the case for self-defeating austerity—described in a blog post by Paul Krugman and a paper [pdf] by Brad DeLong and Lawrence Summers to which Cowen provides links—focuses on the long-run fiscal impact. Both accounts concede that austerity reduces the deficit in the short run. Their argument is that in the current environment of near-zero interest rates, fiscal deficits are unusually cheap to finance and monetary policy is not going to move to offset much (if any) of the effects of fiscal policy on the economy. Under these conditions… there is little short-run fiscal gain to budget consolidation… to the extent that cuts leave unemployment higher, for longer… they reduce the long-run output path worsening, in turn, the burden of government borrowing past, present, and future.
This is the heart of the matter: if fiscal cuts, in Europe and elsewhere, have done less to curtail borrowing than hoped and more to raise unemployment than feared, then they have been worse than useless. Europe might well have done better to have gone all out—on the demand side and the supply side—for growth. That's a conclusion which follows from the best parts of Ms Reinhart's and Mr Rogoff's work. But it's not generally one you hear from them.