So that's what happened to Michael Jackson!
I can't help but think the Obama Administration is properly characterized in this article:
takayama-online.net
They found that public debt/GDP ratios above 90 percent are
associated with an average annual growth rate 1.2 percent lower than in periods with debt
below 90 percent of GDP. They argue that as this relationship is nonlinear these episodes
indicate that causality runs from large public debt to slowdown of economic growth. They
also found that in 11 out of 26 high-debt episodes, real interest rates are not higher than
in low-debt periods.
In this paper we propose simple models that replicate the findings of Reinhart, Reinhart
and Rogoff (2012), and explain how decade-long recession occurs in periods of high
debt/GDP ratios. In our model, unsustainable debt undermines the credibility of government’s
commitment on policy actions. People expect that the government is forced
to default on its debt or to implement fiscal consolidation in finite time, which forces an
incumbent government out of office. As a government wants to maximize its tenure, it will
do whatever is required to extend its tenure. In particular, it will not hesitate to renege
on its commitment if necessary. This lack of commitment on government policy induced
by unsustainable debt undermines the expected profitability of new technology and discourages
firms from adopting new technology. As firms choose inefficient technology, the
economic growth rate and interest rate fall unless fiscal consolidation is implemented. In
a finite period of time, debt default or fiscal consolidation inevitably take place and the
incumbent government falls from power. Once a new government is established as a result
of fiscal consolidation, the length of the new government’s tenure becomes infinite. In
the baseline model, the new government has no incentive to renege on its commitments
because the length of its tenure is already maximized and indefinite. As the commitment
problem is solved by fiscal consolidation, high growth and a high interest rate are
restored. With a different policy setting, however, if the remaining debt is too large, the
new government has incentive to renege on its commitments and the economy stays on a
low-growth path as we show in the second model. This implies that fiscal consolidation
may have little effect on restoring economic growth if it comes too late.
Nails the problem that is being ignorred by current administration ideology.
Bob |
