Policy Research in Macroeconomics

Post-war debt was reduced by productive economic activity, not inflation

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A quick post: pleased to see my letter in today’s Financial Times.  I was responding to a point made by Andrew Tyrie MP in his recent article criticising the IMF, and its Chief Economist Olivier Blanchard.  In the course of it, Mr Tyrie made the often repeated, but wrong, point that the UK government inflated our way out of the post World War 2 high level of public debt (initially over 200% of GDP).  In fact, real GDP grew at its fastest rate during this period, so it was economic activity that drove down the level of debt as a percentage of GDP.

The title given to the letter was “Debt cannot be slashed by grinding austerity” which I quite like, even if it wasn’t really the point I was making. Ah well.

Sir, Andrew Tyrie, in “Blanchard’s admonitions went beyond good advice”, (June 1), states that “inflation was the UK’s main escape route from the crippling burden of debt after the second world war. No one should want to risk repeating it”.

The facts show otherwise, according to the Office for National Statistics. Annual increases in gross domestic product at current prices ran ahead, often well ahead, of Retail Price Index inflation for 19 out of 20 years from 1949 (the start of the data set) to 1968. 1952 was the sole exception, and by a modest margin.

It is through stimulating useful, productive economic activity that one can most swiftly reduce debt as a percentage of GDP, not through grinding austerity.”

In fact, Ann Pettifor and myself had made a similar point (in the course of the great Reinhart and Rogoff rumpus) in an earlier letter to the FT on 21st April 2013:

“Using International Monetary Fund and Office for National Statistics numbers for 1949-2011, we found that UK gross domestic product increased at its fastest average rate – by 3.19 per cent – during the 18-year period (1949-66) when the debt-to-GDP ratio was more than 90 per cent (and mostly way over 100 per cent). This compares with an average of 2.60 per cent for the 36 years when the ratio lies between 30 and 60 per cent. For the other nine years (60 to 90 per cent), the average is 1.93 per cent.

What is more, during the 18 years when the debt-to-GDP ratio was more than 90 per cent, that ratio fell every year without exception. We do not, of course, seek to argue from this that a high debt-to-GDP ratio leads to, or is associated with, higher growth. We simply note that increased economic activity will tend to shrink the debt-to-GDP ratio, while falls in economic activity tend to increase it.”

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One Response

  1. Congratulations Jeremy. Of course the other way of reducing debt is simply to print money and buy it back: a policy which has been implemented on an unprecedented scale recently in the form of QE. But Rogoff and Reinhart and other debt-phobes apparently can’t see what stares them in the face.
    As to any inflationary consequence of the above policy, that’s easily dealt with by raising taxes. But the inflationary consequences of QE appear to have been mild in the extreme.

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