Slow Economy Causes Government Debt

Arindrajit DubeYou may remember earlier this week, I referenced an article by Mike Konczal and his excellent summary of the problems in the famous Reinhart and Rogoff (R&R) paper. The original paper claimed that high government debt led to slow economic growth. The primary argument against this work was that R&R had the causation backwards: in reality, slow economic growth leads to high government debt. Well, yesterday, Konczal published an article by a young economist at Amherst, Arindrajit Dube. In it, he shows, using their own data, that R&R do indeed have the causation backwards.

Dube asked the simplest of questions, “Does a high debt-to-GDP ratio better predict future growth rates, or past ones?” Put another way: does the high debt come before an economic slump or after it? If it comes before, that would indicate that R&R are right: debt causes the economy to tank. But if debt comes after the economy tanks, then R&R are wrong: a poor economy leads to high government debt.

To answer this question, Dube looked at the economic growth in the three years before high government debt. And then he looked at the economic growth in the three years after high government debt. The results: the economic growth is low before the high debt, not after. In other words, slow economic growth causes high government debt, not the other way around. In still other words, R&R are wrong.

What is most amazing to me about this is how slipshod the work of R&R is turning out to be. When I did this kind of work for a living, I took great care. We were always looking for trends and correlations. But in doing so, we would test the data from every imaginable angle. What Dr. Dube has done is this kind of standard work. But it is all the more striking because it is exactly the kind of work you would do if you were arguing (which R&R did outside their paper) that high debt was causing slow growth. The fact that they did no such tests, indicates to me that their work is more political apologia than it is economics.

Three cheers for Arindrajit Dube and his incisive debunking of an important conservative economic canard.

Afterword

If the name Arindrajit Dube sounds familiar, it may be because a couple of months ago, I wrote about his thinking on the minimum wage and the EITC. He’s a brilliant guy.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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