Skip to content

Clash of The Titans

June 8, 2013

It is very rare when academic spat becomes news on media. The feud between Paul Krugman and Reinhart–Rogoff on the relations between debt and GDP growth is all over the world. It is just like the fight between two lawyers inside a tense courtroom where one is making his point while the other refutes it, presenting facts.

But why is this debate so publicized in western media?This debate gets much attention because this relationship is crucial to get the western industrialized economies, which are going through a difficult time since the global financial melt-down, back in track.

In fixing the troubling economies, the whole western world is divided into two schools of thought: first one, known as Austerians, is advocating cuts in government spending for higher output; the other one, on the other hand, prefers to stick to Keynesian books, advocates governments should spend more in this critical time, which in turn will lead to more output, more income and more jobs. For this, if governments have to borrow money, even if the size of the debt is close to or surpasses the GDP, then they should do that.

The crucial part of the debate lies here.

A paper ‘Growth in A Time of Debt’ by Reinhart-Rogoff found that when debt exceeds 90 % of GDP, the GDP growth rate drastically falls.

Paul Krugman argues that the marker never exists and it is due to a coding error. In response, R&R sets forth a question: “If governments thought high-debt is a riskless proposition, why did they avoid it so consistently?”

This said paper is very important because it had been frequently used by the proponents of austerity measures to make their point that austerity is good for growth, not too much government spending.

Krugman ridicules them, quoting John Meynard Keynes, by arguing that govt. should cut spending when economy is experiencing the boom, and not when it is in the slump.

In the end it looks like, if one sees from the broad perspective, it is not just a personal academic fight between Paul and R&R; it is the latest incident of the ongoing tug of war between Austerians and Non-Austerians.

“Let’s settle this in the old fashioned way” Image courtesy: www.cliparts101.com

“Let’s settle this in the old-fashioned way”
Image courtesy: http://www.cliparts101.com

Advertisements
Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: