Ken Rogoff and Carmen Reinhart (R&R) have a good piece in the Financial Times today, "Austerity is not the only answer to a debt problem." This, along with other pieces (for example, here and here), is moving the debate over their work in the right direction. On the one hand, recognition that debt still matters, and too much debt (whether the result of or the cause of low growth) is damaging to our politics and our economics. On the other hand, rejection of the idea that there is a universal growth "cliff" when debt exceeds 90 percent of GDP that is at work across countries (an idea their earlier work promoted, unfortunately). R&R go on to argue that while fixing our debt problem is a central challenge, that doesn’t mean we need aggressive austerity today (though additional stimulus needs to be carefully decided on).
The implications are not only domestic. As Richard Haass notes in Foreign Policy Begins at Home: The Case for Putting America’s House in Order, putting our own house in order is essential to an effective foreign policy as well.
R&R’s comments on European debt also deserve note: "For Europe, in particular, any reasonable endgame will require a large transfer from Germany to the periphery. The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path." Those who read this blog know I agree strongly with this statement, and believe that we have a model already in place--the Paris Club--that provides a way forward. Perhaps after the German elections we will get an open discussion of the need for official debt relief before another crisis hits, but I’m not optimistic.