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Thursday, April 18, 2013

Paul Krugman, "The Excel Depression": Up the Creek Without a Paddle

When examining America's ratio of debt to G.D.P., is there a magic number beyond which the US should not go? At my age, I no longer "believe in magic in a young girl's heart" or any other magic for that matter. But as much as I don't believe in magic, I think one has to be obtuse not to acknowledge that the ratio of debt to G.D.P. in the US is currently in the stratosphere and is indicative of the fact that US debt is unsustainable.

In his latest New York Times op-ed entitled "The Excel Depression" (http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.html?_r=0), Paul Krugman seeks to rip holes in a 2010 paper by two Harvard economists, Carmen Reinhart and Kenneth Rogoff, entitled "Growth in a Time of Debt," which claimed that when debt exceeded 90 percent of G.D.P., economic growth plummeted. Krugman writes:

"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.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth — but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.

Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent 'threshold.'"

Okay, so there is no magical 90 percent threshold. However, as observed by Krugman in an earlier op-ed (http://www.nytimes.com/2012/12/17/opinion/krugman-that-terrible-trillion.html?_r=0), the ratio of debt to G.D.P. is "the best measure of our debt position."

What does the Congressional Budget Office have to say? In a February 2013 report entitled "The Budget and Economic Outlook: Fiscal Years 2013 to 2023" (http://www.cbo.gov/publication/43907), it informs us:

"With revenues expected to rise more rapidly than spending in the next few years under current law, the deficit is projected to dip as low as 2.4 percent of GDP by 2015. In later years, however, projected deficits rise steadily, reaching almost 4 percent of GDP in 2023. For the 2014–2023 period, deficits in CBO’s baseline projections total $7.0 trillion. With such deficits, federal debt would remain above 73 percent of GDP—far higher than the 39 percent average seen over the past four decades. (As recently as the end of 2007, federal debt equaled just 36 percent of GDP.) Moreover, debt would be increasing relative to the size of the economy in the second half of the decade."

Translation without expletives: We're up the creek without a paddle.

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