Monday, May 27, 2013

Growth and National Debt

Austerity proponents like Reinhart and Rogoff have suggested in their now infamous book This Time is Different that debt to GDP ratio higher than 90% has a signification negative impact on growth. Keynesians like Paul Krugman opposes this view.

Here's my take on this debate.

Why do macroeconomists want to link debt to growth? Will micro-economists argue that debt is the most important factor determining growth for companies?  Correlation does not imply causation.

High levels of debt can hinder growth for companies if debt financing results in lack of investment in areas that will result in higher revenue or making the company more profitable in the future. National economies should have the same result. If debt burden results in lack of investment to make countries more efficient then it will hurt growth but if cheap debt can create productive investment then debt is be good.