IMF studies (2011, 2014) of the relationship between growth and inequality, reported by Paul Krugman (“Liberty, Equality, Efficiency, New York Times, 3/10/14, here) surprised the researchers by showing that inequality is directly tied to growth. The corrected Reinhart/Rogoff Study (GITD) remarkably, albeit indirectly, confirmed the relationship, as this post shows: (1) Because the R/R correlation was between income (GDP) and the ratio of public debt (PD) to GDP, and (2) because of the interrelationships among income concentration, tax regressivity and public debt (PD effectively financed wealth concentration at the top), the R/R data surpisingly confirmed the enormity of the decrease in annual growth caused by the concentration of income and wealth in the U.S. The full effect of rising income and wealth inequality on growth, when compounded by an enormous national debt, is stunning.
An insistent question of our time is, how much government debt is too much. Is there some debt level that becomes crushing as opposed to merely costly? The controversy over research by economists Carmen Reinhart and Kenneth Rogoff shows how explosive the issue is. * * *
One group of economists and policymakers argues that annual deficits must be cut because they’re creating — or have already created — dangerous debt levels. Another group contends that large deficits are needed to propel stronger recoveries and reduce huge unemployment. It’s “austerity” versus “stimulus.” If debt exceeding 90 percent of GDP is hazardous, then the case for austerity seems stronger. (Already many countries exceed or are approaching the 90 percent mark.) If not, deficit spending remains a possible temporary spur. Which is it? Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper (“Growth in a Time of Debt”) are embarrassing…
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