“Does Debt Matter?” is the question posed by The International Economy to 20 commentators:
“The recent scrutiny of the popularized version of the Rogoff-Reinhart thesis (that growth plummets when debt exceeds 90 percent of GDP) makes clear there are no simple formulas for determining the risks in the level of a nation’s debt. …Can a realistic guide be fashioned for determining whether a nation’s debt has reached a danger zone? Or are countries from here on expected to pursue fiscal reforms only if and when a crisis sets in?”
Several of my colleagues on the Harvard faculty have recently been casualties in the cross-fire between fiscal austerians and stimulators. Economists Carmen Reinhart and Ken Rogoff have received an unbelievable amount of press attention, ever since they were discovered by three researchers at the University of Massachusetts to have made a spreadsheet error in the first of two papers that examined the statistical relationship between debt and growth. They quickly conceded their mistake.
Then historian Niall Ferguson, also of Harvard, received much flack when — asked to comment on Keynes’ famous phrase “In the long run we are all dead” — he “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.”read more
The year 2013 marks the 100th anniversaries of two separate major institutional innovations in American economic policy: the Constitutional Amendment enacting the federal income tax, ratified on February 3, 1913, and the law establishing the Federal Reserve, passed in December 1913.
It took some time before the two new institutions became associated with the explicit concepts of fiscal policy and monetary policy, respectively. It wasn’t until after the experience of the 1930s that they came to be viewed as potential instruments for managing the macro-economy. John Maynard Keynes, of course, pointed out the advantages of expansionary fiscal policy in circumstances like the Great Depression. Milton Friedman blamed the Depression on the Fed for allowing the money supply to fall. [Tools of fiscal policy used by governments, in addition to tax rates and tax deductions, are spending and transfers. Tools of monetary policy used by central banks include interest rates, quantities of money and credit, and instruments such as reserve requirements and foreign exchange intervention used in various (non-US) countries.]
With November’s election fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, his fiscal stimulus made matters worse. And, despite recent improvement, the level of unemployment indeed remains far too high.not blame George W. Bush for the recession that began two months after he took office in 2001. There hadn’t yet been time for bad policies to damage the economy.)read more