Tags: Reinhart | Rogoff | solutions | debt

Reinhart, Rogoff: Solutions to Debt Woes that Don't Involve Excess Austerity, Spending

By Dan Weil   |   Friday, 03 May 2013 10:06 AM

Harvard professors Carmen Reinhart and Ken Rogoff offer solutions to the debt crisis that they view as a happy medium.

"We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending," they write in the Financial Times. "Governments have used a wide range of options over the ages. It is time to return to the toolkit."

First, governments should start to write down their debts, Reinhart and Rogoff say. "This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the U.S."

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In Europe, write-downs will involve assistance from Germany to its less wealthy eurozone neighbors, the professors say. "The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way toward a stable growth path."

Governments can also push their debt into domestic pension funds, insurance companies and banks, Reinhart and Rogoff explain, by what's known as financial repression.

Letting inflation rise a bit is another solution, they write. "A once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts."

Any solutions that are undertaken must include structural reforms, the duo state. " In the US, for example, the bipartisan blueprint of the Simpson-Bowles commission had some very promising ideas for simplifying the tax codes."

The debate over austerity versus government spending has turned largely political, with conservatives backing austerity and liberals supporting spending.

Perhaps Reinhart and Rogoff's suggestions can convince players on both sides that there is a middle path that can be pursued along bipartisan lines.

The economists have come under fire lately after a trio of University of Massachusetts economists found an error in Reinhart and Rogoff's 2010 study showing that government debt totaling 90 percent or more of gross domestic product (GDP) puts a big damper on economic growth.

In a New York Times opinion piece, Reinhart and Rogoff acknowledge that mistake, but maintain that the study’s conclusion still hold. “Over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of GDP,” they say.

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