The REAL story of the austerity politics in Europe
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July 10th, 2013, 18:00
Thanks. Interesting read. I agree that the initial paper was fundamentally flawed. It's biggest problem is that it focuses primarily on a a one to one relationship between public debt and GDP, when in fact there are a lot of other things at work.
Take the example from the article about Canada 1946-1950. Just looking at debt and GDP growth would lead you to believe there is not a causal relationship between the two, but that ignores that the primary driver of the GDP growth was the end of WWII, thus freeing reasources (both labor and capital) for domestic use. We were no longer destroying trillons of dollars worth of assets year in and year out. That's probably the single biggest driver of that GDP expansion.
So what does that mean for today? Well, despite the amount spent on the War on Terror, we aren't wasting assets like that and we don't have anything like the 'baby boom' on the horizon.
When you have an expanding populace, you tend to have an expanding GDP, regardless of debt levels. Unfortunately for Europe, they don't have an expanding populace, but they do have high debt.
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