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That 90% Feeling...

Jim Henley reads the editors of Bloomberg:

Austerity Principles, or How to Save an Economy in Crisis - Bloomberg:

There are no magic numbers… no correlation between debt today and growth tomorrow… no special number at which debt becomes crippling, such as the 90 percent debt-to-GDP ratio that some attribute to Reinhart and Rogoff…. Fiscal expansion works. When economies are weak, fiscal stimulus is the responsible policy… expansionary fiscal policy may even reduce, not increase, future debt burdens. Fiscal contraction can backfire. If premature, spending cuts and tax increases can make deficits worse. Consider the U.S.’s budget sequestration, which on paper will reduce spending and the federal debt by $64 billion. This is equal to reducing the debt-to-GDP ratio by 0.39 percent. But sequestration will also reduce growth by 0.6 percentage point and lower tax revenue. In the end, as Summers told the Senate Budget Committee this week, it isn’t likely to improve debt-to-GDP at all.

Moreover, the idea of expansionary fiscal contraction is a contradiction. No place illustrates this better than the euro area…. Currencies matter. One important factor is whether a country controls its currency. The U.K. could have improved its competitiveness, for example, by devaluing the pound to lift exports and discourage imports. It probably didn’t need to cut borrowing and spending as deeply as it has, and even the IMF is urging the U.K. to ease off the brakes. To dig out of decades-long deflation, Japan is essentially doing this -- driving down the yen to make its exports cheaper relative to others’ and pumping money into the economy. Portugal and Spain, on the other hand, are in the euro area. They have no control over the currency’s value and therefore can’t use it to become more competitive.

Automatic stabilizers work. In the U.S., when it comes to fiscal policy in times of economic crisis, there isn’t much disagreement between the political parties. But if a separate debate over the proper size of government is allowed to intrude (as it has), the result is gridlock….

Culture matters. It is difficult for many Americans, not to mention most Germans, to swallow the central irony of financial crises: Although they are caused by overconfidence, overlending and overspending, they can be fixed only with more confidence, more lending and more spending. This doesn’t jibe with the belief that if parsimony is good at home, it’s also good for government….

Elected officials should use cultural preferences to their advantage by explaining that debt can sometimes be useful, and then pushing hard for belt-tightening once recovery seems solid….

Happily, the European Union… is backing away from austerity…. Expansionary fiscal policy, mostly by Germany, should be the next move. Germany’s success at becoming a net saver and exporter was possible because of borrowing and importing by Italy, Spain and others. Until Germany allows its surplus to contract, the countries on Europe’s periphery won’t be able to shrink their borrowing.

The U.S., on the other hand, should be closing the large gap between projected tax revenue and spending on Medicare and Social Security. Congress has been doing precisely the opposite by focusing only on cutting discretionary spending, which will soon sink to the lowest level since the 1960s…

But:

When government borrowing subsides, voters are heartened. The widely publicized May 14 Congressional Budget Office report, which estimated that the fiscal 2013 deficit will decline to $642 billion, or 4 percent of GDP (down from 10 percent in 2009), may even be playing a role in recent consumer confidence, consumer spending and home-price improvements….

Austerity isn’t always bad. As we have said, excessive government borrowing can push up interest rates. If the rate exceeds the pace of GDP growth, the level of debt becomes a concern. Every country has its own point at which austerity becomes necessary to avoid rattling the bond markets. It’s best if governments don’t test where that line is…

And the editors write:

For the record, [Reinhart and Rogoff] never said 90 percent was a magic number…

For the record, Reinhart and Rogoff wrote in July 2011 that 90% was an important marker:

Too Much Debt Means the Economy Can’t Grow: Reinhart and Rogoff - Bloomberg…. Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown…

For the record, the Irish Finance Ministry wrote in November 2012:

This is a level viewed as being a significant marker in terms of debt. Below it, a State’s debt level is generally seen to be a safe one, whereas a debt ratio above 90% is generally viewed as one that is an impediment to economic growth.

For the record, the usually-unreliable Washington Post editorial board condemned the:

new school of thought about the deficit…. 'Don’t worry, be happy'…. [there is a] 90 percent mark that economists regard as a threat to sustainable economic growth…

For the record, European Commissioner Olli Rehn claimed and claims that:

when [government] debt reaches 80-90% of GDP, it starts to crowd out activity…

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