Sunday, December 11, 2011

Reality check: Public debt caused collapse? No

There is a popular myth in the US and UK that someone nations that did not run big deficits during the 'good' years from say 1999-2007 condemned themselves to economic hardship and massive deficits.

This kind of thinking is often grounded in the kind of homespun folk knowledge that most false concepts are cluttered in.  An example from Twitter is pretty typical:

 doug de vos 

 my father's father used to say: in the good years, save; in the bad years, don't spend. the diff between uk & nl aside

The saddest thing about the Internet is how quickly people went front typing questions in to Google to typing opinions in to Twitter.  Because it is very easy to test ideas like this.   Above I graph the debt to GDP performance of 6 nations, 3 which are seen as doing well during the current crisis (Germany, Holland and France) and 3 of the worst PIIGS (Iceland, Ireland and Spain).

It is true that Ireland, Iceland and Spain have far higher debt to GDP ratios today than France, Germany and Holland.  BUT from 1998 to 2008 the OPPOSITE was true.  Iceland, Ireland and Spain not only balanced their budgets but also ran significant surpluses over much of the 21st Century.  On the other hand Holland was the only of the three non-PIIGs that was able to balance it books running a small surplus but nothing compared to the massive surpluses that Iceland, Ireland and Spain had.

So if you are the kind of person interested in facts the notion that governments surplus could have been stored away to avoid the current crisis is clearly false.  The sad thing is how few people are ever interested in facts.

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