Debt Doesn’t Cause Low Growth. Low Growth Causes Low Growth.
To start with, using R&R’s dataset, they plot past growth rates vs. present debt for various time periods. This allows them to produce a formula that predicts debt levels based on past growth. Then they plot actual debt vs. predicted debt. The regression line running through the middle of the data tells us the average level of national debt you’d expect based on past growth rates:
Obviously some countries have higher debt than you’d expect based on their past growth, and some have lower debt. So the next question is: Do countries with higher than expected debt levels at a particular point in time have lower future growth than countries with lower than expected debt? If debt truly has an independent effect on growth, you’d certainly think so.
But it turns out this isn’t the case. Not even slightly. Debt simply doesn’t matter. Basically, low growth in the past predicts low growth in the future. That’s all there is to it. However, low growth in the past also predicts high debt, which can fool you into thinking it’s the debt that’s causing low growth in the future. But it’s not.
More: Debt Doesn’t Cause Low Growth. Low Growth Causes Low Growth.