Tuesday, August 31, 2010

Tales of Debt Mountain

Graph #1
A few days back I showed you a mountain of United Kingdom debt spanning two centuries and more. Remarkably, that mountain of debt occurred at the same time as the Industrial Revolution, and the same time as the rise and reign of the British Empire.

To expand upon coincidence, the two centuries of the mountain of U.K. debt completely envelop the 150 years Keynes called "the greatest age of the inducement to invest." As I noted in the earlier post, one is almost forced to wonder whether that mountain of debt actually helped the economy along, encouraging the Industrial Revolution and leading Britain to the top of the heap.

Graph #2
Outrageous thought? Maybe. Maybe not. Numbers from Measuringworth show GDP increasing at an accelerating pace in the early years of the Industrial Revolution. The 2nd and 3rd dots on the trendline at right (years 1759 and 1801) show the awakening of growth. The 4th, 5th and 6th dots (1811, 1821, and 1830) show accelerating GDP growth. The sharpest growth occurs in the 1821-1830 period, just as the UK's mountain of debt peaks and begins its descent.

So the general trend was a steep increase in debt from 1700 to 1820. And after more than a century of persistent increase in debt, GDP was growing like never before.

Graph #3
Debt numbers for Graph #3 come from Robert J. Barro, in Macroeconomics: A Modern Approach, Chapter 14, page 342. Barro's mountain (Figure 14.2, page 344) is smaller than Chantrill's (Graph #1, above), but both show a mountain when debt is compared to GDP.

This look at the raw numbers shows that public debt in the UK did not "peak." It simply stabilized after 1820. It was the growth of GDP that made public debt seem to shrink.

The increase in government debt comes before the increase in growth. We have public debt increasing (1740-1790), increasing rapidly (1790-1820), then stabilizing at a high level. We have Real GDP stable (before 1759), increasing slightly at the beginning of the Industrial Revolution (1759-1811), accelerating (1811-1830), and then achieving the sort of growth we long for today.

We have the increase in public debt first, followed by the increase in GDP. Then there is an acceleration of public debt first, followed by acceleration in GDP. And then we have public debt stabilizing while GDP growth continues, causing the long decline in debt as a percent of GDP that appears on Graph #1. In these events, I think, we witness the birth of capitalism.

Did the growth of debt help the British economy grow? Can't say. But I think we can say with confidence that the massive public debt did not hinder, harm, or cripple growth.


The Arthurian said...

Andolfatto here provides a link to The Rationale of Central Banking where (in Chapter Two) we find:

"And so it was that when the advantages of deposit banking first came to be generally recognised, the most rapid strides were made by those countries where the use of bank currency had been most widespread."

The Bank of England's timeline says the bank was chartered in 1694. That date is right at the start of the debt mountain.

The Arthurian said...

See Reddit and the NBER link:
Debt into Growth: How Sovereign Debt Accelerated the First Industrial Revolution, by Jaume Ventura and Hans-Joachim Voth, dated June 2015:

"Why did the country that borrowed the most industrialize first? Earlier research has viewed the explosion of debt in 18th century Britain as either detrimental, or as neutral for economic growth. In this paper, we argue instead that Britain’s borrowing boom was beneficial."

They explain it in terms of who made big profits and who didn't.
I explain it by saying money was more readily available (so there were more profits, etc, etc).

The Arthurian said...

"Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative…
In a recent paper, we argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015)." -- at Lars P. Syll

Ventura and Voth, again.

Link to VOX