A Bit More R & R, Time to Giggle

In my younger years, when free love was pretty much free, there was the adage: "Herpes, the gift that keeps on giving". Well, our friends R&R have become an economic herpes virus. I love it! While it isn't a Liberal Attitude to pile on simpletons, this is one case where I'll play the Social Darwinist card.

Another Ummie has filleted them, this time taking into account most of the considerations I've mentioned earlier.

This pattern is a telltale sign of reverse causality. Why would this happen? Why would a fall in growth increase the debt-to-GDP ratio? 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. For all of these reasons, we should expect reverse causality to be a problem here, and these bivariate plots are consistent with such a story.

Reality based policy is sooooo inconvenient. Well, if your goal is overall growth of the economy. If you only care about the .1%, then data doesn't matter at all.