Well, does it?  Edmund Conway reports on a study that thinks so: the unimpeachable source is Reinhart and Rogoff, a book that is always praised. But there are several problems with any simplistic interpretation of this table.  One is the obvious problem of causality:  weak growth can cause high debt, after all.  And joint causes: a war, say, can incur massive debt and damage your growth (unless you are the USA!).

But I think that for the UK the correlation is even more suspect.  Of the last 170 years, we have spent about 81 with debt levels above 90%.  1830-65 – when we led the world, industrially – then all the interwar years, and then the first 20 after WWII.    These are the data-points for the Reinhart Rogoff table, and we can find better reasons for the growth levels for each of those periods.

Here is a chart, showing UK govt debt ratios, and GDP growth per head (using Angus Maddison data).

The scary red bits are when our debt was above the danger level.  The growth figures are 6 year moving averages, which is why it takes such a long time to recover from the wars in this chart.  Now, it is possible to make a few observations.  One, I can’t help making after yesterday’s post, is about how high our GDP/head growth was in the era of big government after the War*. The next is that some really high growth periods have occurred when debt is high.   You can see them: this table also helps.

Years Nickname Average Debt Average GDP/head growth
1830-65 We rule the world . . . 133.47% 1.66%
1865-1914 Victorian depression? 48.21% 1.06%
1919-1939 Interwar misery 160.04% 1.72%
1947-64 Post war recovery 144.32% 1.98%
1965-2003 Thatcher and Brown 45.63% 2.09%

What is the conclusion of all this?   Um, that the government debt ratio is just one factor in about  a million that will determine whether we grow fast or not.  Not going to war again would be a good start.  Cost of capital matters, but so does other stuff.  The Victorians borrowed as cheaply as anyone in the world, with a debt ratio of >100%.    And Victorian GDP growth was much more variable than the modern period.

Above all, look at the example of Japan.  We can grow with debt being high, perhaps.   We can’t get debt down without growth, for sure.

(ps. The IEA doesn’t like debt, surprise surprise.  I would like to see them reflect on Wagner’s Law).

* in the interests of impartiality, I should point out that much of 1945-73 is catch up growth, grabbing innovations that the US had taken a lead on.  Not as hard to do as pushing the production possibility frontiers back


9 thoughts on “Does high debt consign us to neverending low growth?

  1. “I should point out that much of 1945-73 is catch up growth, grabbing innovations that the US had taken a lead on.”

    Yeah but debt was reasonably high in the US during most of that period too (though not as high as over here obviously).

  2. Fair point. I think the US period was fairy unique: a huge burst of innovation during the war, pent up consumer demand. But it does at least show that the enormous growth of the US state did not prevent econ growth itself. Not compared to is absence, 1929-33

    1. Yes, and even during rationing too!

      And I think wouldn’t it be fair to say that state intervention helped after the war too, with the G.I. bill?

  3. Post war US? Large productivity growth from early 30’s onwards. That’s going to work through into GDP growth at some point and as we know, it didn’t really do so in 1930-1945 (being realistic about what blowing up what you’ve just made does to growth).

    1. I agree with Tim. The Depression and War presented an extraordinary, unique period for aggregate demand relative to potential supply. As massive technical advance went ahead with dysfunctional or artificially constrained consumer demand, the rebound post War was going to be enormous.

      However, would it have rebounded so well if the govt had been just 2% of the economy? I suspecxt not

  4. We don’t have a historically high level of government debt.

    We have a historically high level of government deficit.

    What effects does that have?

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