Low growth leads to high debt, not the other way round

Charts of the day.

Two big holes have been left by the revelation of serious flaws in the Reinhart-Rogoff paper on austerity. The first is that the concept of a criticality at high levels of debt has been demolished. The original paper showed a massive drop in growth rates for countries with debt to GDP ratios over 90 per cent; that simply does not hold anymore. Insofar as the paper shows any negative association, it is linear – the step from 60 to 70 per cent is no more dangerous than the step from 85 to 95 per cent.

But there's also now an absence of notable economists claiming that high debt ratios cause low growth. In Reinhart and Rogoff's initial response to Herndon, Ash, and Pollin's paper, the authors point out that "we are very careful in all our papers to speak of 'association' and not 'causality'". That's true, but they have also not been shy about endorsing suggestions that there is an element of causality involved – and their paper has been widely misinterpreted as showing as such.

However, Arindrajit Dube presents pretty compelling evidence that the causality lies in the direction everyone but the austerians expected it to: slow growth causes high debt to GDP ratios, not the other way round. It's as simple as two charts:

 

The first image shows the correlation between the debt to GDP ratio in any given year, and the growth in the three years after it. Really low debt comes before high growth rates – but for nearly every other level of debt, the average growth in the next three years is 3 per cent.

Looking backwards, though presents a very different picture. There's strong linear relationship between low growth in the past and high debt-to-GDP ratios now.

And that's not surprising! As Dube writes:

One reason is just algebraic. The ratio has a numerator (debt) and denominator (GDP): any fall in GDP will mechanically boost the ratio. Even if GDP growth doesn’t become negative, continuous growth in debt coupled with a GDP growth slowdown will also lead to a rise in the debt-to-GDP ratio.

Besides, there is also a less mechanical story. A recession leads to increased spending through automatic stabilizers such as unemployment insurance. And governments usually finance these using greater borrowing, as undergraduate macro-economics textbooks tell us governments should do. This is what happened in the U.S. during the past recession.

The easiest way to cut the debt – in the only measure which matters, which is it in relation to the size of the economy – is to increase growth, at least back to the long-term trend. Going at it from the opposite direction, and cutting the debt in the hope it will bring growth back, is a recipe for disaster.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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After the leadership battle, immigration is Labour's new dividing line

Some MPs are making a progressive case for freedom of movement controls. 

After three brutal months of infighting, culminating in another sweeping victory for Jeremy Corbyn, the buzzword at the Labour party conference is unity. But while Corbyn’s opponents may have resigned themselves at least temporarily to their leader, a new fissure is opening up.

Considering it was sparked by Brexit, the Labour leadership contest included surprisingly little debate about freedom of movement. In the immediate aftermath of the EU referendum, Corbyn declared he was “not afraid to talk about immigration”.  Owen Smith, his rival, referred to the “progressive case against freedom of movement”. But ultimately, the contest embodied a clash between the will of the membership and the parliamentary Labour party. 

Now, though, the question can no longer be dodged. What position should Labour take on freedom of movement? And is it time for a fundamental shift on immigration?

Labour’s 2015 pledge to “control immigration” was widely derided by its own party activists – not least when it appeared on a gift shop mug. Apart from making a rather authoritarian present, one of the flaws in this promise was, at the time, that the only way of really controlling immigration would be to leave the EU. 

But an increasingly vocal group of MPs are arguing that everything has changed. Heavyweights from the Miliband era are now, from the back benches, trying to define limits to freedom of movement and immigration. Chief among them are Rachel Reeves and Chuka Umunna. 

Reeves makes her case from an economic perspective. She argues that freedom of movement from the EU has depressed wages (the cause and effect is disputed). At a Resolution Foundation event during Labour conference, she recalled visiting a factory in her constituency where workers complained the jobs went to foreigners. 

Umunna, on the other hand, argues unease with immigration has a cultural element as well. He has said that immigrants need to stop leading “parallel lives”. At the Resolution event, he declared of Brexit: “This isn’t all about economic equality – it is about identity politics.” Umunna's tough talk on integration may coincide with his bid to chair the Home Office select committee, but his observations about the underlying distrust of immigrants rings true. 

How Labour copes with freedom of movement depends on which view prevails. It is possible to imagine the party coming up with an answer to the freedom of movement question that involves Corbynite economic themes, such as protecting wages, labour rights and restrictions on agency recruitment. Lisa Nandy, another speaker at the Resolution event, rallied the audience with a story of workers on low wages standing “in solidarity side by side” with migrant workers. It would be a distinctly left-wing argument that critiques the Government’s tolerance of zero-hours contracts and other precarious employment practices. 

But if, as Umunna suggests, Brexit is also an articulation of a deeper anti-immigrant feeling, Labour is entering more dangerous territory. On a tactical level, it is hard to see how the party can beat the May Government when it comes to social conservatism. It undermines any attempt to broker a "soft Brexit", which many of Labour's members, who voted Remain, will want. 

And then there's the prospect of the party most closely associated with ethnic minorities condoning xenophobia. Labour activists point out that some of the Brexit backlash is plain old racism. Speaking at a Momentum rally during the leadership contest, Diane Abbott, the shadow health secretary and one of Corbyn’s closest allies, declared: "Anyone who tells you maybe you have to do something about these Eastern Europeans, it's not about skin colour, what we've seen since the Brexit vote gives lie to that. 

“If you give ground to anti-immigrant politics, it will sweep away all of us. And we cannot give ground to that stuff. You cannot as a Labour movement take a position that one part of the working class is a problem of another section of the working class."

More pragmatic MPs too, still remember the ill-fated immigration mug. They see the new “tough on immigration” line as an uneasy alliance between working-class MPs on the Labour right, and a group of middle-class metropolitans who have spotted a gap in the market and jumped on it. Should this second attempt, Labour MPs will have achieved nothing except alienating their activist base. 

Ultimately, the initiative lies with Corbyn. If he can set out a radical agenda for protecting workers’ rights, he may be able to bring the party with him. But if this fails to shift opinion polls, immigration could be the next issue to disunite the party.