Debt Level vs GDP Growth
There is no doubt that the relationship between economic growth and debt levels is one of the most controversial topics that raise debates in discussions. It also generates varied interpretations among economic analysts and policymakers. The article structure in my opinion is essential as it provides arguments against previous conclusions and the authors' reasons to concede or not agree. Robert Pollin and Michael Ash (2012) have challenged previous findings by Rogoff and Reinhart on account of the methodology, omission and coding error. While Rogoff and Reinhart (2010) in their research concluded that, the average growth falls during periods when the overall level of debt is in excess of 90%, research findings by Pollin, Herndon, and Ash from the University of Massachusetts disputed these findings.
Nonetheless, they also concluded that the overall growth of a country declines when the overall debt level exceeds 90% of the total GDP. According to Pollin, Herndon, and Ash, the only discrepancy with the findings by Rogoff/Reinhart (2010) was the nature of the methodology utilized at arriving to the conclusions advanced. The Amherst research team argued that there was an exaggeration of the causal relationship between economic growth levels and overall debt levels in Rogoff and Reinhart’s findings. The overstatement arose in part due to the use of questionable methods of analysis and in part due to the reliance on incomplete information to generalize the findings. While Reinhart/Rogoff cited the rate of economic growth to be 01% in countries where the amount of debts exceeded 90%, the Amherst team argued that the level of growth should be at 2.2%.
Other than the above discrepancies in the methodology and the nature of the conclusion, the major issue of the debate was not addressed. For instance, the answer as to whether high debt levels lead to declining economic growth or whether it is the slowed growth that is responsible for the increase in the overall debt level. Equally confusing is the nature of circumstances prevailing in the affected countries. To provide answers to this question, it is emphatically crucial that the direction of causality should be analyzed. Does debt precede increased growths or is the reverse true? It is also crucial to consider if the relationship between high-debt to the growth level versus low growth is linear.
It is logical to assume that low levels of debt must prevail before periods of high growth are encountered. Many a times, a decrease in the GDP is likely to improve the GDP-to-Debt ratio. Equally, in order to reduce debt within an economy, the level of overall growth must be increased. It is also not easy to achieve this objective due to the difficulties in the realization of the objective of increased growth levels through debt reduction.
Arguing that high levels of debt lead to the realization of a reduction in the economic growth rate which is an indication that findings from Rogoff and Reinhart were right. The opposite indicates that a poor performing economy leads to increase in government debt. In this instance, it is right to assume that a decline in economic growth would lead the government to borrow funds in order to finance the level of economic operations. This conclusion provides implications to Rogoff and Reinhart findings especially to the nature and credibility of their methodology and findings. Conclusively, there may exist double causality between debt and growth. This occurs given that the weak economic growth rate may lead to increase in debts through reduction in taxes and an increase in public expenditure. However, it is clear that public debt leads to GDP growth.
References
CNNMONEY. Reinhart & Rogoff response to herdon, Ash, and Polin Critique. Retrieved from http://money.cnn.com/interactive/news/economy/reinhart-rogoff response/?iid=EL
Rogoff, K., and Reinhart, C. (2010). Retried from http://scholar.harvard.edu/rogoff/publications/growth-time-debt
