amount that it slows growth of GDP and tax revenues, causing the budget deficit to grow. What Rogoff and slow growth generates budget deficits. This goes a long Reinhart do not sufficiently account for is the causation”: “reverse way toward explaining the correlation they find between slow growth and deficits: as economists teach, correlation does not prove causation! Actually, there are always two ways to achieve the same budget deficit ratio: the ugly (Japanese) way and If fiscal policy remains chronically too tight even in recession, economic growth is the virtuous way. destroyed, tax revenues plummet, and a deficit opens up. that is—unfortunately—the US path in this So far, recession, The alternative a path already well-worn by two decades of Japanese experiments with belt-tightening. (let us call it the is that a downturn is met with an aggressive and appropriately-sized discretionary Chinese example) response. growth is quickly restored, tax revenue begins to grow, and the budget deficit is In that case, reduced.
amount that it slows growth of GDP and tax revenues, causing the budget deficit to grow. What Rogoff and Reinhart do not sufficiently account for is the “reverse causation”: slow growth generates budget deficits. This goes a long way toward explaining the correlation they find between slow growth and deficits: as economists teach, correlation does not prove causation! Actually, there are always two ways to achieve the same budget deficit ratio: the ugly (Japanese) way and the virtuous way. If fiscal policy remains chronically too tight even in recession, economic growth is destroyed, tax revenues plummet, and a deficit opens up. So far, that is—unfortunately—the US path in this recession, a path already well-worn by two decades of Japanese experiments with belt-tightening. The alternative (let us call it the Chinese example) is that a downturn is met with an aggressive and appropriately-sized discretionary response. In that case, growth is quickly restored, tax revenue begins to grow, and the budget deficit is reduced.
CNDI_2012___Keynesian_Spending_Core.docx