Growth in a time of icebergs

PREFACE

MUCH TALK LATELY ABOUT GOVERNMENT DEBT CREATING PROBLEMS WHEN IT REACHES 90% OF GDP.
I DON'T KNOW IF YOU NOTICED, BUT THE PROBLEMS HIT THE FAN, COUPLE YEARS AGO NOW.
SINCE THEN, GOVERNMENT DEBT HAS BEEN GROWING LIKE CRAZY.

THAT 90%-OF-GDP NUMBERS SEEMS TO HAVE ORIGINATED IN A RECENT STUDY BY CARMEN REINHART AND KENNETH ROGOFF. THAT STUDY IS THE TOPIC OF THIS POST.

24 AUGUST 2010, ARTHUR SHIPMAN

S'pose I told you I've been studying icebergs. Studied a lot of 'em -- 44 of 'em, to be exact. Looked at each one several times at least, for a total of 1483 observations.

It has been known for some time that a relation exists between icebergs and shipwrecks. We were therefore careful not to get too close to the subjects of our study. Also, we did not peer beneath the surface, as the water was very cold. Anyway, we were too far from the 'bergs to see very much.

We did manage to lasso one iceberg and tow it to warmer waters. We chanced approaching it there, and we made what we think is an important discovery: Apparently icebergs sink in warmer waters. Our inspection beneath the surface revealed that a large portion of the 'berg was submerged in the warm waters. This submerged ice was not visible in the colder waters.

During the journey to warmer waters, we noticed the iceberg getting smaller. Some thought it was melting. Others said it was sinking. Our observation beneath the surface seems to confirm the latter view.


In a PDF titled Growth in a Time of Debt, Carmen Reinhart and Kenneth Rogoff write:

In this paper, we exploit a new multi-country historical data set on central government debt as well as more recent data on external (public and private) debt to search for a systematic relationship between debt levels, growth and inflation.

Reinhart and Rogoff examine government debt and external debt.

In this paper “public debt” refers to gross central government debt. “Domestic public debt” is government debt issued under domestic legal jurisdiction. Public debt does not include debts carrying a government guarantee. Total gross external debt includes the external debts of all branches of government as well as private debt that is issued by domestic private entities under a foreign jurisdiction.

By "government debt" they mean (for the U.S.) the debt of the federal government. By "external debt" I think they mean debt owed to foreigners.

Our topic would seem to be a timely one. Government debt has been soaring in the wake of the recent global financial maelstrom

Yes. But Reinhart and Rogoff's motto seems to be Don't look back. They have little interest in the debt that actually created that global financial maelstrom.

Our main focus has been on total public and total external debt, since reliable data on private internal domestic debts are much scarcer across countries and time.

Reliable data on private internal domestic debt is "scarce." That's why they ignore it. Somebody has to make a big deal of this, I think. The water was very cold.


From this Federal Reserve site you can get the most recent stats on U.S. debt. I got the June 10, 2010 release. I downloaded the PDF of "Debt growth, borrowing and debt outstanding tables." It's a three-page paper. Page 3 is "D.3 Debt Outstanding by Sector."

This is the kind of information Reinhart and Rogoff wish they could get for all the nations in their study. I wish it, too. But there is no reason to ignore the available data, from any nation that does make the data available.

From the "Debt Outstanding" PDF I took Federal government debt and Foreign debt, added them together, and called it debt that is "considered" by Reinhart and Rogoff. Then I took Total Households debt and Total Business debt and State and local governments debt and Domestic financial sectors debt, added them together, and called it debt that is "not considered" by Reinhart and Rogoff.

I apologize if I'm tedious. It's what I'm best at. If you want more, click this to see the breakdown of "sectors."

Anyway, I took the available info and made a graph of it. The graph doesn't show what Reinhart and Rogoff were talking about. It only shows the portion of debt they looked at, and the portion they didn't look at, for the United States.

The zero line, where pink and blue meet, is the water line. Above the waterline, the blue shows the amount of U.S. debt considered by Reinhart and Rogoff. Below the waterline, the pink shows the amount of U.S. debt that Reinhart and Rogoff ignore. The debt they ignore is between four and five times larger than the debt they consider.

Their search for systematic relationships gives new meaning to the word "incomplete." Their conclusions cannot possibly be of much value. Their study is as flawed as my tale of the icebergs.