There is no correlation between austerity and debt reduction | Hacker News Reader

There is no correlation between austerity and debt reduction

equitablegrowth.org

4 pointsMaysonL4 comments

I'm sorry but I reject this line of reasoning. If I was to use an analogy it would be along the lines of, "It's not my fault I'm always broke (even though I keep borrowing and spend everything I have)". Sounds ridiculous doesn't it?

Nations who reduce spending but do not get rid of their principal debt (not just keep up with interest payments) will never get out of that debt.

But saying it's not a choice (as implied in the link) is bunk.

This is not "a line of reasoning." This is a data set published in a paper by the IMF:

http://www.imf.org/external/pubs/ft/wp/2013/wp1367.pdf

See figure on top of page 12, "Figure 5. Correlation between Discretionary Fiscal Policy and Change in the Debt Ratio in European and G20 economies (1980-2011)"

"We identify annual episodes of discretionary fiscal tightening in European (EU27) and other G20 economies since 1980, using, as a criterion, a positive increase in the structural primary balance. In general, the debt ratio does not decline when the structural primary balance ratio improves from one year to the next. Instead, we find a (small) positive correlation between fiscal consolidation and annual change in the debt ratio, as indicated by the positive slope of 0.3 in Figure 5. This result is of course only illustrative, as correlation does not entail causality and the data dispersion is quite large. Therefore, a more advanced econometric analysis is warranted to determine whether a robust empirical relationship exists between fiscal consolidation and the initial increase in the debt ratio."

I've consulted to the IMF as a finance and economic consultant so I'll take that report as conjecture and not fact.

Surely you can't rebuff my reasoning here.

Governments control spending, and have a large part in what they earn (taxation, economic, monetary and fiscal policy).

If you spend more then you earn, and you spend too much, the debt repayment will overcome your ability to pay off your debt.

If you cut back and spend less than your means, and you use the net excess cash to pay off your debts (that can be paid down on a capital, and not interest only basis), then you can get back to a situation where you are out of debt and can spend more again.

I submit to you that Government spending works the same way.

What makes Government debt evil IMHO is that it is burden forced onto future generations to the advantage of the current one.

The old government = household fallacy. A government is fundamentally different from a household because its spending is a significant percentage of its own income. Every time a dollar originally spent by the government changes hands in the economy, taxes are paid.

Also, debt always has 2 sides: it is a liability of the government, but an asset of the lender, who is very often a citizen of the same country and whose offspring will inherit the claims.

Reply on news.ycombinator.com