Antonio Fatas and the Chain of Causality

From GDP growth is not exogenous by Antonio Fatas:

Ken Rogoff in the Financial Times argues that the world economy is suffering from a debt hangover rather than deficient demand. The argument and the evidence are partly there: financial crises tend to be more persistent. However, there is still an open question whether this is the fundamental reason why growth has been so anemic and whether other potential reasons (deficient demand, secular stagnation,…) matter as much or even more.

The Ken Rogoff opening is an attention-grabber. I'm sure you remember Reinhart and Rogoff and the 90% threshold -- when public debt reaches 90% of GDP, they said, bad things happen to economic growth. You remember.

But I remember something else Rogoff said, after that, in Debt supercycle, not secular stagnation at VOX:

I will argue that the financial crisis/debt supercycle view provides a much more accurate and useful framework for understanding what has transpired and what is likely to come next...

The evidence in favour of the debt supercycle view ... includes the magnitude of the housing boom and bust, the huge leverage that accompanied the bubble, the behaviour of equity prices before and after the Crisis, and certainly the fact that rises in unemployment were far more persistent than after an ordinary recession that is not accompanied by a systemic financial crisis. Even the dramatic rises in public debt that occurred after the Crisis are quite characteristic.

See it? Even the dramatic increases in public debt, he says. This time Rogoff is clearly not saying the big increases in public debt are the cause of our troubles. Those increases "occurred after the Crisis", he says. Consequence, he says, not cause.


The Rogoff article linked by Antonio Fatas is dated 9 October 2015. From the opening:

What is the right diagnosis of the ailing global economy? ...

Some argue that we are living in a world of deficient demand, doomed to decades of secular stagnation. Maybe. But another possibility is that the global economy is in the later stages of a debt “super cycle”, crushed under a burden accumulated over years of lax regulation and financial excess.

I had to look. Fatas says Rogoff "argues that the world economy is suffering from a debt hangover rather than deficient demand." I had to check that. When I read Fatas, I thought he might be misinterpreting Rogoff. He's not. He's right. Rogoff sees secular stagnation as one possibility, and crushing debt as "another possibility".

Rogoff sees the excessive debt explanation as an alternative to the deficient demand explanation.

That's just plain silly. Excessive debt is not an alternative to the "deficient demand" explanation. Excessive debt is the cause of deficient demand. First, the growing cost of growing debt consumes a growing portion of income. So demand atrophies gradually at first. Then, people suddenly come to think of their debt as excessive, and they suddenly cut their borrowing and spending. Demand falls suddenly -- economists call that a "shock" -- and we have "deficient demand".


Let me start again. Antonio Fatas:

Ken Rogoff in the Financial Times argues that the world economy is suffering from a debt hangover rather than deficient demand... However, there is still an open question whether this [debt hangover] is the fundamental reason why growth has been so anemic and whether other potential reasons (deficient demand, secular stagnation,…) matter as much or even more.

No. It's not an open question. Excessive debt is the cause of deficient demand. Secular stagnation is the result.