Do we really want to wait till things are that bad?

Via George Washington's blog at ZeroHedge, Reinhart and Rogoff: Responding to Our Critics by Carmen M. Reinhart and Kenneth S. Rogoff:

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

This view generally reflects the state of the art in economic research...

Let me shorten that up and say it again:

“Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative...”

So the focus of state-of-the-art economics is to find the point where adding one more dollar of debt stops making GDP go up and starts making GDP go down.

What possible object could there be to that effort? It can only be so that we might manage to come as close as possible to the threshold without crossing it. That may be state of the art, but it sure ain't the state of Arthurian.

Look: Debt productivity has been declining for a long time. The increase in GDP we get per dollar of new debt has been declining for a long time. And that's not just Federal debt. It's all of our debt. Increasing debt makes economic performance decline.

If it is true that increasing debt makes economic performance decline, then why would we want to push it close to the limit where "the correlation between debt and growth becomes negative"? This is like saying "Adding more debt is not okay if it takes away even a tiny bit of GDP, but it is okay as long as it adds to GDP, no matter how little it adds."

But it's not okay with me. As I see it, our economy can grow at maybe 4% per year. If it's only growing 3% I look first to accumulating debt to account for the 1% loss of growth. If it's only growing 1.5% I look first to accumulating debt to account for the 2.5% loss of growth. If the economy crosses the threshold and growth "becomes negative" at -0.1% say, then I look first to accumulating debt to account for the 4.1% loss of growth.

The point is, it's not okay to get one or two percent growth. It's not okay to keep getting less and less growth while more and more debt accumulates, and then only stop just short of zero growth. It's not okay. We need to stop debt accumulation when it starts to hinder growth; this is how we define the maximum acceptable level of finance for our economy. A level of finance something like we had in the 1960s, the early 1960s, is my target.

So the state of the art in economics seems to disagree with me: They are wrong.

And just to be clear on this: When I say "I look first to accumulating debt" to account for the loss of growth, I don't just mean the Federal debt. I mean all of our debt.