Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky)

By Matthew Berg and Brian Hartley, Ph.D. students
University of Missouri-Kansas City


We find that the correlation between government debt-to-GDP ratios and future growth in Reinhart and Rogoff’s (2010a and and 2010b) dataset results from outliers which come from the country most suggestive of the hypothesis that slow growth causes high levels of government debt – Japan. This evidence strengthens and reinforces criticisms recently made by Herndon, Ash, and Pollin (2013) of research suggesting a negative relationship between government debt-to-GDP ratios and real GDP growth rates. As Reinhart and Rogoff (2013) recently and quite correctly noted, “the frontier question for research is the issue of causality.” We join Reinhart and Rogoff’s call for more research illuminating this important question. To that end, we use Reinhart’s and Rogoff’s dataset, as corrected by Herndon, Ash, and Pollin (2013). Following and reinforcing Dube (2013) and Basu (2013), we use LOWESS regressions and distributed lag models and find evidence suggesting that correlation of government debt-to-GDP ratios and future growth are much more likely explained by “reverse” causation running from slow GDP growth to high government debt-to-GDP ratios than by “forward” causation running from high government debt-to-GDP ratios to slow growth. Furthermore, what little evidence there is for forward causation appears to stem almost entirely from Japanese outliers. Because – as economists generally recognize – Japan is the clearest of all cases of reverse causation, this considerably weakens the argument for forward causation. In addition, we find tremendous heterogeneity on the level of individual countries in the relationship between current government debt-to-GDP ratios and future growth. This suggests that even if substantial evidence for forward causation is eventually discovered in cross-country studies, the effect will likely be small in size and unreliable, and therefore not relevant to economic policy decisions in any particular individual country. Our findings are suggestive, but not conclusive, and more research is needed. We suggest that simultaneous equations models may offer a way forward on the “frontier question” of causality.


We will present additional evidence which strengthens and reinforces criticisms recently made by Herndon, Ash, and Pollin (2013) (hereafter HAP 2013) of Carmen Reinhart’s and Kenneth Rogoff’s 2010 paper, “Growth in a Time of Debt,” (hereafter RR 2010a and 2010b) and Reinhart’s and Rogoff’s related book, “This Time is Different.” As Reinhart and Rogoff (2013) recently and quite correctly noted, “the frontier question for research is the issue of causality.”

Specifically, after obtaining data from RR and while using that data to replicate RR 2010a and 2010b, HAP (2013) found “coding errors, selective exclusion of available data, and unconventional weighting of summary statistics” which appear to largely invalidate RR 2010a and 2010b’s conclusions, including RR’s (2010a and 2010b) well-publicized claim that at a government debt-to-GDP ratio of about 90, a “tipping point” is reached, after which real GDP growth rates rapidly decline.

Shortly thereafter, Arindrajit Dube provided further evidence against RR’s thesis. In “Reinhart/Rogoff and Growth in a Time Before Debt” (hereafter Dube 2013), he conducted an initial econometric analysis of HAP’s/RR’s data, using LOWESS regressions and distributed lag models in a very substantial blog post. Dube’s results included preliminary evidence which seems to indicate that any relationship between high government debt-to-GDP ratios is more likely the result of causation running from slow GDP growth to high government debt-to-GDP ratios (“reverse causation”), than the result of causation running from high government debt-to-GDP ratios to slow GDP growth (“forward causation”).

We follow Dube’s lead and further analyze the same dataset used by RR 2010a and RR 2010b which HAP 2013 obtained. First, in addition to the issues already highlighted by HAP 2013 and Dube 2013, we find that the relationship between current debt-to-GDP levels and future growth is highly heterogeneous between countries. Even if some sort of relationship between debt-to-GDP and growth can in fact be found in cross-country panel analysis, that relationship does not appear to hold up on the level of individual countries. Because economic policy is made on the level of individual countries, this heterogeneity appears to undercut the rationale for any given particular country to make important policy decisions on the basis of government debt-to-GDP ratios.

Second, we find a substantial outlier – Japan – in the data, and we find that extreme Japanese data have a disproportionate effect upon the overall cross-country analysis. While it is not valid to simply ignore data from Japan (that would be selection bias), Japanese data appears to be responsible for any (small) apparent negative relationship between current debt-to-GDP levels and future growth which might remain in the wake of HAP 2013 and Dube  work.

This leads one to suspect that more thorough analyses of causality is fairly likely to confirm the reverse causation story, in which low levels of growth cause high debt-to-GDP ratios. In fact, Deepankar Basu has begun such research in “The Time Series of High Debt and Growth in Italy, Japan, and the United States.” (2013) Basu uses a 2 variable Vector Autoregression model for the US, Italy, and – most relevant to this post – Japan, and finds that “the time series pattern of the dynamic relationship between public debt and economic growth in the postwar U.S., Italian, and Japanese economies is consistent with low growth causing high debt rather than the high debt causing low growth.” Basu’s “evidence is contrary to RR’s claim that high debt leads to low growth” and “clearly supports the anti-austerian position that low growth leads to higher public debt.”

We would like to thank Herndon, Ash, and Pollin for making their data freely available for download and would like to thank Dube for making his stata .do file freely available for download.

Country Heterogeneity

Dube’s analysis uses a panel which combines the 20 countries in RR’s dataset. However, it is also worthwhile to take a look at the data on the level of individual countries, even if only to get a sense of what the data really looks like. If there is a general relationship can be found in panel analysis, that relationship might apply clearly across countries. But alternatively, it might be the case that countries are heterogeneous, that there has been a different relationship between government debt-to-GDP ratios and growth in different countries, at different times, and with different sorts of institutions. Importantly, if there is a great deal of heterogeneity across countries, it may be the case that much of the overall effect is the result of data from a single country.

Indeed, that is precisely what we find. In Figure 1 below, are “backwards/forwards” LOWESS charts for all 20 individual countries. Full sized PDF versions for all 20 countries are available for download here.

Figure 1: Backward/Forward LOWESS Charts For All 20 Countries

For each country, there are two graphs, showing the relationship between current year’s debt-to-GDP and last three years’ average growth rate on the left, and showing the relationship between current year’s debt-to-GDP and next three years’ average growth rate on the right. The relationship between current year debt-to-GDP ratios and future growth is clearly highly heterogeneous, and different countries show a wide variety of different sorts of relationships between the two variables. For instance, Australia has a smoothly upward-sloping relationship, Italy has a fairly smoothly downward-sloping chart, Greece has a U-shaped chart, Spain has an upside down U-shaped chart, the United Kingdom has a fairly horizontal chart, and the United States has a chart which fluctuates up and down several times.

These individual country backwards/forwards LOWESS charts look much as one would expect if there is no real relationship between current government debt-to-GDP levels and future GDP growth. Likewise, they look much as one would expect if the effect size between current government debt-to-GDP levels and future GDP growth is small, and if there are many complex political-economic variables which are omitted from this simple relationship.

It is plain that these charts do not show any sort of consistent, reliable, or robust relationship between current year government debt-to-GDP ratios and future economic growth. This has important policy implications, because the policy case for attempting to reduce government debt-to-GDP ratios through austerity measures in any given country is premised upon the notion that, for that particular individual country, at that particular point in history, with any particular set of institutions, and regardless of whether or not the country controls its own currency, that this graph will be reliably downward sloping. Further, RR 2010a and 2010b’s analysis suggests that not only will the graph be reliably downward sloping, but that it will suddenly plunge downwards at the government debt-to-GDP ratio of 90. Clearly, no such predictable and reliable relationship exists in the data for individual countries.

The Impact of Japanese Data

In the particular case of Japan, there is a very strong negative relationship between the current year GDP growth rate and the current year government debt-to-GDP ratio. This is evident from Japan’s individual country “backwards/forwards” LOWESS regression chart, shown below in Figure 2:

Figure 2: Future and Past Growth Rates and Current Government Debt-to-GDP Ratio (Japan Only)

Moreover, a disproportionate number of the Japanese data points are extreme outliers – at both ends of the debt-to-GDP spectrum. A small number of extreme Japanese data points have an outsized influence for predictions of growth at both very high and at very low government debt-to-GDP ratios. Put simply, no other country in Reinhart’s and Rogoff’s 20 country dataset looks at all like Japan. To understand why, we will very briefly summarize relevant post-World War II Japanese economic history.

In 1942, Japan defaulted on bonds owned by Allied nations, because it was engaged in total war. As the war in the Pacific ground on, Japan’s government debt-to-GDP ratio shot upwards, until it reached about 200%. At that point, the allied bombing raids which destroyed much of urban and industrial Japan set off hyperinflation, which rapidly brought Japan’s government debt-to-GDP ratio down all the way to about 10%. As Reinhart and Rogoff themselves note in their paper, “The Forgotten History of Domestic Debt” (2008), “Domestic public debt was almost 80 percent of total domestic liabilities (including currency) in 1945 Japan, when inflation went over 500 percent.” At the same time, the destruction of much of Japan’s capital stock meant that after the war ended, Japan was poised to achieve high rates of growth in part simply from rebuilding what had been destroyed, as well as by adopting foreign technology and building up its export sector.

Figure 3: Japanese Government Debt-to-GDP ratio, 1885-2010 

Hence the Japanese economy – and the government debt-to-GDP ratio – essentially re-started from scratch following Japan’s defeat in World War II. If Japan had been on the Allied side in World War Two, it most likely would have exited World War II with a very high government debt-to-GDP ratio, as did countries like the US and Australia. And then, as was the case in the US and Australia, the debt-to-GDP ratio would likely have fallen during the post-war boom. But because of its disastrous defeat, Japan entered the post-war era with an extremely low government debt-to-GDP ratio.

From 1956 (when Reinhart and Rogoff’s dataset commences) to 1971, as Japan rebuilt its economy, the average GDP growth rate was a very high 8.7% and the average government debt-to-GDP ratio was just 7.7%. From 1971 to 1990, the Japanese economy slowed down a bit but maintained strong positive growth. Then, from 1991 to 2000, following the collapse of Japan’s real estate bubble, Japan’s economy grew at just a 1.2% average rate, while the debt-to-GDP ratio averaged 72 (increasing throughout the period). And from 2001 to 2009, Japan grew at an average rate of .5%, while the debt-to-GDP ratio averaged 153 (again increasing throughout the period). Although the data does not go past 2009, Japan’s “lost” period is now approaching a quarter-century.

In the graph below, we can see that this history adds up to a very strong negative relationship between Japan’s GDP growth rate and its government debt-to-GDP ratio:


But Japan is perhaps the clearest of all examples of backwards-causation. In the case of Japan, the reason why the debt-to-GDP ratio has gone up so much in recent decades is that the Japanese economy has barely grown. And the reason why, from the end of World War II until 1970, the debt-to-GDP ratio was so low was that (as a legacy of the fact that it lost World War II), it started with a low government debt-to-GDP, and then it was able to grow very quickly by rebuilding what had been destroyed. As Paul Krugman (2013) has explained, (emphasis added):

“As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.”

At least as importantly, the Japanese data are chock full of extreme outliers. This is not surprising given the economic history and the chart above, but we can see more clearly the sort of effect that Japanese data have on the overall picture by comparing the distribution of government debt-to-GDP ratio data points directly, between Japan and all the other 19 countries in the dataset:


Note that the Japanese outliers at high debt-to-GDP ratios appear less extreme in the chart above than they actually are because the high-end data are condensed into debt-to-GDP ratio buckets of 100 to 150 and > 150.

Data for the 19 non-Japan countries is strongly clustered in the range of a debt-to-GDP ratio from about 10% to 60%. But whereas the distribution of data for these 19 countries looks at least vaguely like a “bell curve,” the Japanese data have “fat tails.” Overall, 77% of non-Japanese lie within a debt-to-GDP ratio of 10% to 70%. But only 46% of the Japanese observations lie within that same 10% to 70% range.

28% of the Japanese data points are outliers on the low side, in the 0% to 10% debt-to-GDP ratio category. As is obvious from the rudimentary account of post-war Japanese economic history above, this data all comes from the early post-war era, when Japan was rebuilding out of the ashes of World War II and when Japan had very high and sustained growth rates. These observations from the period of Japan’s post-war “economic miracle” thus exhibit a strong tendency to tug estimated growth at low debt-to-GDP ratios sharply upwards.

Another 26% of the Japanese data points are on the high side, at debt-to-GDP ratios of greater than 70%. And at the far extreme end of the distribution, 11% of the Japanese data points are from debt-to-GDP ratios above 150%, while only 1% of the non-Japanese data points are from debt-to-GDP ratios above 150%. All the Japanese data points with high debt-to-GDP ratios stem from the lost quarter-century, and hence are associated with low growth rates. These data points thus exert a strong force pulling down any estimates of growth at high debt-to-GDP ratios.

LOWESS Regression Showing the Relationship Between Current Debt-to-GDP Ratio and Past/Future Growth

Using Dube’s stata .do file, we re-ran his analysis excluding Japan, thereby indirectly determining what effect Japanese data has upon the analysis. To emphasize, it is not valid to simply exclude Japanese data. Instead, the point is to indirectly see just how strong of an impact Japanese data have on the overall picture, and the point is that the strength of Japan’s effect leads one to anticipate that further analysis is likely to confirm the reverse causation hypothesis.

In Figure 6 below is a 19 country “backward/forward” LOWESS chart, which is exactly the same as a 20 country “backward/forward” LOWESS chart produced by Dube, except it does not include data from Japan. This chart shows the relationship between current year’s debt-to-GDP ratio and the last 3 years’ average GDP growth (on the left) and the relationship between current year’s debt-to-GDP ratio and the next 3 years’ average GDP growth (on the right).

Figure 6: Future and Past Growth Rates and Current Government Debt-to-GDP Ratio (Excluding Japan)

One can see from the left-side graph that a clear negative relationship between current year debt-to-GDP ratio and past growth is preserved, suggestive of reverse causality. But from the right-side graph, the relationship between current year debt-to-GDP ratio and future growth no longer looks at all negative, but rather is quite flat. This means that the (small) negative relationship between current year debt-to-GDP ratios and future growth which was preserved in Dube (2013) appears to be either mostly or entirely driven by Japan.

To facilitate a direct comparison between Dube’s original chart which includes all 20 countries and our chart which includes 19 countries (all except Japan), Figure 7 provides a side-by-side comparison.

Figure 7: Relationship Between Future Growth and Current Debt-to-GDP Ratio – Side-By-Side Comparison Including and Excluding Japan


As we can see in Dube’s original chart (to the left), which includes Japan, there seems to be a fairly weak but nonetheless visible negative relationship between current year debt-to-GDP ratio and next 3 years’ GDP growth rate. This relationship is by far the strongest at low debt-to-GDP ratios, which does not make sense under the forward causation hypothesis.

But excluding Japan, one can see (in the chart to the right) that if there was previously a negative relationship, it all but vanishes. The chart excluding Japan is still very slightly downward sloping at very low debt-to-GDP ratios. From debt-to-GDP ratios of 50 until about 150, the line is essentially flat but slopes very slightly upwards. And from debt-to-GDP ratios of 150 to 250, the line is likewise essentially flat but slopes very slightly downwards. But at high (and low) debt-to-GDP ratios, 95% confidence bands widen substantially because there is less data available at the extremes. For all practical purposes, the chart excluding Japan is a flat horizontal line. This indicates that to the degree Dube (2013) provides evidence of a relationship between current year debt-to-GDP ratio and future growth, that evidence comes from – of all countries – Japan.

Impulse Response of GDP From Dube’s Distributed Lag Model

Next we use a distributed lag model and determine the impulse response of GDP growth if we do not include Japan (for a 10 point increase in the debt-to-GDP ratio). This is a more sophisticated way to look at the data than the LOWESS regressions above, because it gets a bit closer to the question of causation (though in reality, this looks at the relationship between variables through time, which is not necessarily the same thing as causation).

If we are correct in thinking that Japanese outliers are skewing the LOWESS regressions, then the distributed lag model may do a better job at picking up and correcting for the skew. But on the other hand, since Japan is an obvious case of reverse causality, if the backwards looking impulse response is substantially different when excluding Japan, then that would be bad news for the reverse causation explanation. But what we find is that the impulse response graphs look almost identical regardless of whether or not Japan is included. This is true both with and without fixed effects, as one can see from the side-by-side comparisons in Figures 8 and 9 below:

Figure 8: Impulse Response of GDP Growth from a 10-point increase in Government Debt-to-Income Ratio: Side-By-Side Comparison Including and Excluding Japan

Figure 9: Impulse Response of GDP Growth from a 10-point increase in Government Debt-to-Income Ratio (With Fixed Effects): Side-By-Side Comparison Including and Excluding Japan

So, it appears that the impulse response results in Dube (2013) are not merely attributable to the influence of Japan (an obvious case of reverse causation). The evidence which seems to suggest reverse causation is apparently more deeply rooted across other countries, and not just in Japan. That evidence is clearly visible in the fact that in all of these impulse response graphs, the blue line is lower on the left (for years in the past) than on the right (for years in the future). This is also consistent with findings from Basu’s(2013) VAR models.

LOWESS Regression With Control For 1-Year Lagged GDP Growth

Finally, again following Dube (2013), we apply a LOWESS model excluding Japan. The result is Figure 10, which shows the relationship between current year debt-to-GDP ratio and current year GDP growth rate, both with no control (left) and with using 1-year lagged GDP growth as a control variable.

Figure 10: Current Growth Rate and Current Government Debt-to-GDP Ratio, Without and With Control for 1-year Lagged GDP Growth

Unsurprisingly, we can see in the graph on the left that without any control, there is a negative overall correlation between the current year growth rate and the current year debt-to-GDP ratio. There is no dispute about that – the question is whether that relationship is the result of forward causation, or of backwards causation.

Once again, we will use a side by side comparison of Dube (2013)’s chart (including Japan) and our chart (excluding Japan) to make Japan’s impact on the overall analysis plain:

Figure 11: Current Growth Rate and Current Government Debt-to-GDP Ratio, Without and With Control for 1-year Lagged GDP Growth: Side-By-Side Comparison Including and Excluding Japan

It is true that in Dube’s original chart (on the left) the negative relationship between current year real GDP growth rate and current year debt-to-GDP ratio is weak enough that it might not even exist (given the wide confidence bands). However, the chart may give the impression of a downward sloping relationship.

But when Japan is excluded (on the right), the regression line undeniably becomes quite flat. To be sure, the regression line on the right (without Japan) is not perfectly flat and horizontal. The line goes very slightly down at first until approximately a debt-to-GDP ratio of 30, then flattens out until about 150, then goes very slightly upwards, and then flattens out again. But for all practical purposes, this is about as flat a line an econometrician will ever obtain.

It appears, once again, that any small negative relationship between current year debt-to-GDP ratio and current year growth is a Japanese phenomenon – and given the results of VAR analysis on Japan in Basu (2013), that fact illuminates the issue of reverse causality vs. forward causality.

More analysis is still needed to fully confirm that the forward causation hypothesis is unfounded, and to further explore hints suggestive of reverse causation. VAR models ultimately only tell us whether one variable precedes another variable (which is not the same thing as causation) and can be vulnerable to omitted variables. Famously, Sims (1980) discovered that including the short term interest rate as a variable in his VAR model resulted in a complete reversal of his conclusions, from supporting “Monetarism” to supporting “Keynesianism.” So in addition to VAR models, simultaneous equations models and other methods may offer further evidence on the question of reverse causality.

Perhaps more importantly, as Nersisyan and Wray (2010) point out, the argument that high ratios of government debt-to-GDP cause low growth remains plagued by misconceptions, at least for nations which issue their own currency. Investigating differences between alternative monetary regimes, including the unit of account in which sovereign debts are denominated, provides an interesting avenue for further exploration.


We would like to thank Dr. Peter Eaton for his very valuable comments.


Basu, Deepankar. (2013, Apr. 17) “The Time Series of High Debt and Growth in Italy, Japan, and the United States.”

Dube, Arindrajit. (2013, Apr. 22) “Reinhart/Rogoff and Growth in a Time Before Debt.”

Herndon, T., Ash, M., and Pollin, R. 2013 “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” Political Economy Research Institute at University of Massachussetts Amherst,

Krugman, Paul. (2013, Apr. 19). “The excel depression: Commentary.” New York Times, pp. A.31.

Nersisyan and Wray. (2010) “Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different , by Reinhart and Rogoff.” Working Paper No. 603, Levy Economics Institute of Bard College,

Reinhart, C. M. and Rogoff, K. S. (2010a). “Growth in a Time of Debt.” American Economic Review: Papers & Proceedings, 100.

Reinhart, C. M. and Rogoff, K. S. (2010b). “Growth in a Time of Debt.” Working Paper 15639, National Bureau of Economic Research,

Reinhart, C. M. And Rogoff, K. S. (2013, Apr. 25). “Reinhart and Rogoff: Responding to Our Critics.” New York Times.

Reinhart, C. M. and Rogoff, K. S. (2008). “The Forgotten History of Domestic Debt.” Working Paper 13946, National Bureau of Economic Research,

Reinhart, C. M. and Rogoff, K. S. (2009) This time is different: Eight centuries of financial folly, Princeton University Press.

Sims, C. A. (1980). “Comparison of interwar and postwar business cycles: Monetarism reconsidered.” The American Economic Review, 70(2), 250-257.

28 responses to “Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky)

  1. Submitted for publication?

  2. Excellent work guys.

  3. Mark Robertson

    If we wish to refute Rinehart and Rogoff, then we do not need graphs, data, analyses, “regressions,” and lengthy articles that few people will ever read.

    Quite simply, for countries that have Monetary Sovereignty, the debt-to-GDP ratio is meaningless. Furthermore, the “national debt” is a national asset, and the government’s deficit is society’s surplus.

    Rinehart and Rogoff deny this. Hence they are liars. The End.

    • Of course, what you say is right, and was done in the critiques of RR by Randy Wray and Yeva Nersisyan and Bill Mitchell back in 2010. But what Matthew Berg and Brian Hartley have done here is to test empirically the MMT view that there’s no reason to believe that the debt-to-GDP ratio has a negative impact on growth, except, of course, in certain cases, the presence of an indirect relationship between variations in the debt-to-GDP ratio through the actions of politicians pulling back on government deficit spending and consequently having a negative impact on economic growth through that mechanism.

      Guess what? The MMT prediction survived the test; but the neoliberal Pete Peterson prediction that the debt-to-GDP ratio, controlling for political self-fulfilling prophecies, has a negative impact on growth is refuted by the results. That’s a valuable contribution. Lengthy technical paper or not. Thanks Matthew and Brian. In the long run, and from the point of view of macroeconomics this a is a more significant contribution than Thomas Herndon’s or the Dube and Basu analyses.

      There are some more elaborations I’d like to see however. I think the RR data set is terribly biased, and was constructed to try to prove that there was a negative relationship between the debt-to-GDP ratio and economic growth. The interests supporting the RR work, both in its inception, and in disseminating its original results, were clearly trying to develop a basis for saying that since there is such a negative relationship the right thing to do when the ratio gets too high (over 90%) is to implement a program of austerity aimed at deficit reduction more or less drastic depending on the individual case.

      This advice has been followed in many nations, in part because of the influence of RR and other studies from the same neoliberal camp, and in part because neoliberal elites wanted to believe in the austerity fairy tale for various reasons including perhaps a desire to widen the wealth gap between the very rich and the middle class, and also a belief that belt-tightening in welfare states has moral value for the population subjected to that belt-tightening. But now, lots of austerity has been practiced and the results of this policy preference are now in. So, can we build on the biased and incomplete RR data set to begin to test alternative hypotheses about the effects of austerity and different types of fiscal and monetary policy on different outcome variables? Perhaps variables and measures of economic and social value gaps like these:

      — the gap between actual output and projected “full” output;

      — High involuntary unemployment vs. full employment;

      — Price stability vs. inflation or hyperinflation;

      — Minimum wage vs. a living wage;

      — No operative right to health care for everyone;

      — social exclusion and the loss of personal freedom;

      — skill deterioration due to unemployment;

      — psychological harm such as sense of identity, self-respect, and sense of

      — much greater ill health and reduced life expectancy than necessary;

      — loss of motivation to live a full empowered life;

      — deterioration of social relations, communities, social networks, and family life;

      — increasing racial and gender inequality;

      — increasing educational inequality;

      — decreasing equality of opportunity;

      — loss of social values and sense of individual responsibility;

      — increasing economic inequality over time;

      — increasing poverty;

      — increasing crime rates including increasing use of control frauds by
      important economic institutions;

      — Failure to prosecute and punish people who commit control frauds;

      — The collapse of real estate values and the destruction of the wealth of
      working people after the crash of 2008;

      — increasing anger against economic and political elites that get more and
      more and more wealthy, and more and more immune to the rule of law;

      — increasing political inequality undermining political, social, and economic democracy;

      — increasing political unrest and threats of political violence both from the privileged and those seeking change.

      — increasing environmental degradation;

      — Increasing climate change/global warming.

      — the gap between current energy foundations of our economy and new energy foundations based on renewables.

      Clearly, it will involve more of an effort to gather the necessary data in some of these areas than in others and doing this kind of thing is a multi-year job. But it’s imperative that something like this gets done, because the kind of narrowly focused data set created by RR is biased towards the concern of neoliberal ideology with debts, deficits, inflation, and economic growth, and its lack of concern with the impact of its favored economic policies on a range of outcomes important for most people. We need to be gathering data on those outcomes and analyzing the past, present, and likely impacts of alternative fiscal and monetary policies on such outcomes.

      In addition, this list of factors is one specification of the idea of “public purpose.” One way of looking at MMT, congenial I’m sure to Jamie Galbraith, Warren Mosler, Bill Mitchell, and perhaps, to most of us who consider ourselves favorable to the MMT approach, is that it is “Economics for the public purpose,” unlike other major approaches hih appear to emphasize different values, and unlike neoliberal economics which seems focused on growth above all. If that’s true then I think the data sets associated with MMT economics and testing its theories ought to reflect our ideas about public purpose and its various elements in the context of 21st century nations. So, I think there’s a lot of data gathering to do and a lot of testing of alternative theories to be done. The field can’t be left to the RRs of the world who will bias both data gathering and its analysis to pet neoliberal notions about reality and what we value in it.

      • Mark Robertson

        With all due respect Joe, do you think that average people would ever read an analysis like the one above? Could it ever make a dent in austerity mania? No. By going into lengthy analyses of debt-to-GDP ratios, we cede control of the narrative to the austerians. There is no need to analyze the “national debt” at all, since the U.S. government creates Treasuries out of nothing, and sells them by choice, not necessity. Moreover the Fed choose its own interest rates, and creates (out of nothing) the interest on T-securities. Besides, the “national debt” is also national, assets, and most of the “debt” is owed to ourselves. So what does it matter if the debt-to-GDP ratio is 10% or 1000%? What difference can it make? Why even discuss it? Why not stick to the simple facts?

        The debt-to-GDP ratio is also pointless for euro-zone countries, because they do not create their own currency. Hence, with the exception of Germany, they are doomed no matter what their ratio is. They have no choice but to adopt more austerity until they are destroyed (or until they go back to creating their own money). To mention the debt-to-GDP ratio at all is to distract from this reality.

        That’s just my opinion, of course.

      • Joe,

        That’s why this video is still so important. Throw it on while you’re cleaning your desk sometime:
        Sir James Goldsmith, founder of the Eurosceptic Referendum Party (came out of retirement to do it), in a prophetic interview with Charlie Rose. November 15, 1994.

  4. Thanks and much kudos to the authors for extending the R&R associations between debt and growth, into a reminder that debt is the hole that economies get into, while idling productive capital and labor — a failure to generate growth — is the shovel used to dig.

    Why, we might ask, have we allowed all these resources to sit idel, harming our supply side (and thereby, the demand)? Pretty easy argument that our free markets for labor, capital (plant & equipment AND housing) have utterly failed to clear the way textbooks claim they should. Blaming Quantitative Easing as the reason why we’re stuck at zero interest rates is really laughable when the economy isn’t finding investments, and borrowing, worth ANY interest rateabsent the Federal government.

    This piece — not the work itself! — could be a bit better still with a bit of careful editing. The text immediately under the paired LOWESS charts is somewhat mangled, and the money quote, “[b]ut for all practical purposes, this is about as an econometrician will ever obtain” would be more quotable with the authors’ beliefs inserted.

    We are a bit late in recognizing the harm that we have done to ourselves by advocates for lenders trying to protect them, at the expense of the overall health of the economy, but if egregious errors were necessary to provoke work such as this, perhaps we’ll come out ahead after all.

  5. Since we know from MMT that the domestic private sector needs a net contribution from either or both of the other two sectors for economic growth to take place it is mooching off others to expect federal government to borrow and pay interest on government bonds held by the domestic private sector in order to make that net contribution.

    • reserveporto

      Christine Desan, Coin Reconsidered: The Political Alchemy of
      Commodity Money, 11 Theoretical Inquiries in Law, Article 13

      That paper that someone linked around here somewhere has me thinking the “net contribution” you refer to is the sale by the gov’t of liquidity. And the purpose of saving, as opposed to investing, is to acquire liquidity. Liquidity can be sold by private banks as credit, but that kind is quite expensive. The cheapest and most reliable kind of liquidity is that sold by central gov’ts.

  6. Nick R (Kyoto)

    Wait, I must be missing something. I would think post-bubble Japan matters MORE than the experience of other nations with respect to the question of causality, because (1) Japan is a major, post-industrial, econony (2) with its own currency (hence it is not subjected to “forced” debt reduction) (3) because its public debt is sky high and rising, and (4) because it cut rates to zero, embraced ‘QE-infinity’ and other heterodox monetary policies, and(5) has refused to cut entitlement spending. Japan is also over a decade “ahead” of the West in its misguided attempt to steer its economy back to growth. Japan’s experience obviously matters a lot more to the global economy than, say, Greece’s or New Zealand’s.

    Any Ricardian effects from high and rising public debt should be most pronounced here, and should serve as examples for the rest of the first world.

    Citing Paul Krugman’s unsubstiantiated (yet politically convenient) claim that the causality “obviously” runs only one way makes your work that much more suspect. I have lived here over two decades (two Lost Decades I might add) and I can assure you that the causality runs both ways, here as R&R predicted. And I am not a poltical hack with an axe to grind.

    Rather than view Japan as an outlier, I would place it front and center of any discussion of growth and public debt.

    For my part, the larger macro-economic lesson to be learned from Heisei Japan is the importance of allowing major asset bubbles to burst (and not attempting to prop them back up endlessly), rather than allow oneself to enter into a multi-decade sovereign debt trap. But this is a discussion for another place and time.

    • Matthew Berg

      I agree that Japan is very important. In a way, it’s the centerpiece of the argument we are making.

      The LOWESS regression charts only show correlation, not causation, so I’ll focus on the distributed lag models and the impulse response functions in my reply.

      I think one of the areas for improvement in the models above is that they only look a short time into the past. The distributed lag model only looks back 3 years, and assumes that anything that happened before then does not matter. Whereas in reality, I would hypothesize/suspect that in the case of Japan, the high government debt to GDP ratio stems not just from the last few years of subpar growth, but rather from the entire period (going back to the Nikkei crash). But even so, we see very little difference in the Impulse Response graphs, whether or not Japan is included.

      An additional complication with really determining causation is endogeneity. All that these models can do is show us the order in which things happen in time, which is not necessarily the same thing as causation.

      Here’s an example of that from the Chris Sims (1980) article mentioned in the 2nd to last paragraph — Milton Friedman found that changes in the money supply precede changes in economic growth. Sims (and others) were able to replicate this econometrically. From this, they concluded that since changes in the money supply happen before changes in economic growth, they must CAUSE changes in growth. However, when Sims included the short term interest rate in his model, that precedence went away.

      If you think about it, here’s why – when people decide that they want to spend money (or when businesses decide they want to invest), they go to the bank and get a loan. The fact that they get a loan causes the money supply to increase. But it takes a bit of time for them to actually spend the new money, and so if you simply measure precedence in time, you will find (as the Monetarists did), that changes to the money supply precedes growth. But what really drives growth is not the change in the money supply – but rather the decision of people/firms to invest and spend money.

      I think we could find similar sorts of things on this question. One obvious example – which seems to me to apply especially to Japan – is that politics is endogenous. We know for a fact that in response to high debt to GDP ratios, Japanese politicians have often responded with cuts to spending or tax increases. The reason for this is not necessarily that they have to, but rather is that they think they have to. So the sequence runs like this:

      1) Slow growth causes the debt to GDP level to rise.
      2) Because the debt to GDP ratio has risen, Japanese politicians begin to panic, and start thinking (incorrectly) that they need to increase taxes or lower spending, and that this will cause the economy to improve.
      3) As a result of the cuts or tax increases,
      4) And then at a few points in between all of this, they try some quantitative easing and maybe occasionally a bit of fiscal stimulus.

      So in the story above, we might say that 1) is ultimately causing 3), but it is also true that 2) precedes 3).

      And so for that sort of reason (#2 preceding #3), I would not rule out that we might find some sort of apparent forward causation. In fact, we don’t really see that to any substantial degree in the data/analysis above, but I would agree with you that it’s not impossible. The question is – how are we to interpret this?

      The world is complex, and not easily captured in a simple mathematical model. So the main contribution that I hope we have made above is to show that there does not appear to be any clear or reliable relationship between current debt to GDP levels and future growth.

      • That’ why we need broader data sets to test our theories. How the politicians react to rising debt-to-GDP ratios is key to understanding, if they’re always taking 3 steps forward and 2.5 steps back on deficit spending then that can very well account for two decades of stagnation, or five years of it in the United States, accompanied by steadily increasing debt-to-GDP ratios. So, we need the politicians reactions coded and placed in our data sets and then they need to be part of the data analysis along with the economic and financial variables.

  7. I read the words until I could no longer understand what I was reading. 😉

    So…Matthew and Brian, when you are finished tweaking and you have a final version ready for publication (the writer’s equivalent of ‘shitting Constantinople’), could you two do a simple Warren Mosler version? You know, the ultra simple version that we non-econ grads can recite at the dinner table?

    I suggest (I want) three sections:
    (1) Here’s what Reinhardt and Rogoff did/said. (Bidda-bing, bidda-bang)
    (2) Here’s what Herndon discovered.
    (3) Here’s why it’s the MMT view (h/t Joe Firestone)

    From those out here who actually read this blog hoping things will sink in.

    • Brian Hartley

      We would be happy to, just as soon as exams let out! Though in this particular piece we don’t do much exposition of the MMT view – mainly concerning ourselves with how sample selection has an large impact on the types of stories one wants to tell about the causal relationship between sovereign debt and growth. More careful research would surely include a extended discussion about which countries and time periods are justly compared, and monetary sovereignty (or lack thereof) certainly should play a big part of that.

      • Thanks, Brian.

        Yabbut, I’m talking about taking an umbrella view. Sort of along the lines of–enter beer talk over the summer for you two to figure it out–the kind of way Mosler would use to explain the issue on a general talk radio show.

        I think it’s important for two reasons. Reason one. These two Harvard guys (yeah, OK) used their degrees and their institution to drop a load of filtered manure on an unsuspecting public and groups of governments. Result? Their degrees and institutional cachet bamboozled the public and governments. Consequence? Millions upon millions of lives affected negatively, jobs lost, careers never started (Eurozone unemployment), family homes lost, children starving at home, suicides.

        Reason Two. If you can encapsulate what happened from inception (their paper, or was it a book?) to the destructive, catastrophic consequences–it only took three years–in a meaningful way, you can introduce a new paradigm in which the public completely mistrusts neoclassical economists.

        The beer might help. Good luck with your exams.

  8. Tom Whelan

    The ratio of government debt to GDP seems to me to be the wrong metric for analyzing the effects of government debt on future economic growth. This ratio omits the critical variable that determines whether public debt helps or hinders future growth: the economic return on a given loan expenditure. Public loan expenditures invested in assets that generate positive economic returns contribute positively to future GDP, national income, and most importantly, future growth potential. Public loan expenditures used for consumption or invested in unproductive assets drag down economic growth, reduce disposal incomes, and lower economic growth potential going forward. The lack of economic return generated by the asset purchased with public debt increases the relative burden of debt service on future incomes. It’s not the size of the debt, in and of itself, that helps or hinders GDP growth but the relationship between the size of the debt and the return, more precisely, the lack thereof, generated by the assets purchased with public debt (or private debt for that matter).

    Two bridges tell the tale. Spending $1000 to build a bridge between Milltown and Wheatville employs 100 bridge builders for a year. But its real contribution to future economic growth and the expansion of output capacity in the form of lower transportation costs only begins once the bridge is finished. After it is built, the new bridge cuts Farmer Jones’ travel time in half, from two days a week to one, cuts his out-of-pocket travel costs in half, saving him $125 in travel costs, which more than offsets the $100 he pays annually in additional taxes. Even though Farmer Jones gets the same price for his wheat at the mill (his reported income remains the same), the new bridge raises his enjoyment income (it frees a day for leisure or more work) and increases his real income by lowering his cost of living. Instead of spending $250 on travel, Farmer Jones spends $125 on travel and $100 in additional taxes, leaving him free to spend, save, or invest the $25 that he used to spend on travel. Farmer Jones standard of living goes up, even though the revenue from farming does not.

    Contrast the new bridge between Milltown and Wheatville with the infamous bridge to nowhere. Building a $1000 bridge to nowhere employs the same 100 bridge builders for a year and adds $100 to Farmer Jones tax bill, but no one in Milltown or Wheatville uses the darn thing. Building it provides work to 100 men for a year, but it consumes their labor, puts wear and tear on the equipment, and strands the cost of the material used to build it in a permanently unproductive form. The bridge to nowhere provides no valuable services to recoup its cost. The bridge to nowhere imposes real and monetary opportunity costs. Farmer Jones enjoyment income falls (he does not gain a day every week), and he and the economy loses a day of leisure or a day of his work. The money cost, $100 in higher taxes, lowers Farmer Jones’ disposable money income and standard of living by $100. Farmer Jones has paid $100 for a bridge he cannot productively use, and he must forego spending that money on other goods and services, reducing his spending and the contribution his spending in the out years would have made to GDP.

    This analysis is implicit in Minsk and Fisher: “The structure of an economic model that is relevant for a capitalist economy needs to include the interrelated balance sheets and income statements of the units of the economy. The principle of double entry bookkeeping, where financial assets are liabilities on another balance sheet and where every entry on a balance sheet has a dual in another entry on the same balance sheet, means that every transaction in assets requires four entries.” (Minsky p. 77). “The bookkeeping implications of such couples of items were discovered by accountants long ago and are the basis of their double entry bookkeeping, though its economic significance has been largely overlooked. One important significance is that this double entry prevents double counting; when we take the sum total of all income items for society, including psychic as well as physical items, this double entry results in cancelling out everything except the psychic items of enjoyment and labor pain.” (Fisher p. 20). These accounting principles trace stocks and flows across time and expose the constraints that result from the inefficient, as opposed to the efficient, allocation and use of resources.

    A lot of bad macro starts with bad accounting. MMT and Post Keynesian macro, ironically, is no exception, even though MMT and Post Keynesians do not dismiss accounting foundations out of hand as do most orthodox ivory-tower macro model makers. Minsky, Keen, et al see part of the problem, the balance sheet constraints imposed by excessive private debt, but normative policy preferences seem to blind most MMT and Post Keynesians to the pain — unemployment and slow growth — caused by the the pitiful lack of return on far too much public “investment.” Governments, in virtually every significant way, is a pass through entity. CBO projected that Uncle Sam’s self-generated revenue, fines and fees, for 2012 would be about $20 billion and Fed earnings would be a little over $80 billion. Virtually every other significant inflow to Uncle Sam is first an outflow from the private sector (sovereign purchases of Treasury debt excepted). Sorry, for the tone, and the monetary digression. I dislike snarky, but, as Keen confesses, it seems to be the only way for heretics to get attention of those who already know they are right.

    • Tom, I followed you until here:

      Virtually every other significant inflow to Uncle Sam is first an outflow from the private sector (sovereign purchases of Treasury debt excepted).

      I don’t understand. Wasn’t “every other significant inflow to Uncle Sam” first an outflow from the public sector? I mean, isn’t that how the private sector gets it in the first place?

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  11. Tom: Public loan expenditures used for consumption or invested in unproductive assets drag down economic growth, reduce disposal incomes, and lower economic growth potential going forward.

    Not so. If they cause more “multiplier” employment in the all-holy private economy, then public loan-expenditures – even if of negative value – say paying people to destroy resources – can be positive for the economy as a whole, as Keynes and Lerner said.

    Basically, something like your analysis is true only in the rare case of full employment. At other times, there are no trade-offs or negative effects of the kind you fear.

    Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesment on the principles of classical economics stands in the way of anything better Keynes, GT, p.129

    There are three situations to compare here. The high unemployment status-quo. The productive expenditure situation. The unproductive expenditure situation. Of course better to do the “productive” than the “unproductive”. But as Keynes saw, it is usually better to do the “unproductive” bridge-to-nowhere, than nothing at all, than to discard and destroy gargantuan quantities of resources – above all labor.

    You commit the error Keynes warns against in the very next passage. E.g. Invalid comparison of the unproductive expenditure situation to the productive expenditure situation in order to criticize the unproductive expenditure relative to doing nothing during high unemployment. (“Farmer Jones enjoyment income falls (he does not gain a day every week), and he and the economy loses a day of leisure or a day of his work.”)

    It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly “wasteful” forms of loan-expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict “business” principles. Judging these loan expenditures on “strict business principles” is nonsense. Keynes was more prescient here than many of his colleagues. What the bad guys fear the most is a JG, because it can work, very easily, and then they won’t be lording it over everyone else.

    unemployment and slow growth — caused by the the pitiful lack of return on far too much public “investment. The pain and slow growth is caused by decades of starvation of public investment worldwide – public investment, even “wasteful” ones of the kind so many criticize, would cause low unemployment and high growth, as they did everywhere in the postwar full employment Keynesian era.

    Governments, in virtually every significant way, is a pass through entity. Virtually every other significant inflow to Uncle Sam is first an outflow from the private sector. This only makes sense financially, where it is completely false, as MRW notes. Government create base money, currency when they spend and destroy it when they tax. The private sector needs financial inflows from Uncle Sam’s outflow, not vice versa. Governments can just create money “loan-expenditure” is Keynes’s applicable word – and pay to build bridges to nowhere (good) or somewhere (better). You make this error too when you say that the farmer’s tax bill necessarily goes up. Conceivably it may, in the future, but this is a tiny, indirect, historically unimportant, neglibible effect.

    • Tom Whelan


      Alone among men, disciples of Keynes assert with equal earnestness that waste gives birth to prosperity and thrift begets penury. To graft, rent seeking, and plunder, Keynesians give the lying name stimulus; they make an economic wasteland and call it recovery.

      In all seriousness, you are right to raise Keynes. My argument in the earlier post is a conscious critique of Keynes’ paradox of thrift, his idea that building two pyramids, two roads, or saying two masses when one will do can raise the income of the community. It seems to me, these measures double the costs, halve the yield, mistake debt for income, and, by ignoring the consequence of using debt without regard to whether a capital asset generates a positive or negative income stream, impoverish the employed and increase unemployment.

      My critique of Keynes is offered in the same spirit in which Keynes offered his own, except that I believe Keynes and his disciples are the defunct economists whose wrong ideas hold sway over the impractical men who now hold power. I share Keynes’ stated motivation, to reduce economic hardship, but I do not share his faith that deficit spending is the way, debt forgiveness is the truth, and zero interest is the light. Waste paves the crumbling road to economic hell, no matter how well intended. In the long run, we are all dead, but the Keynesian focus on the short run virtually assures that we will all die poor.

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