Debt delusions: The misleading statistic that makes politicians irrational about debt.

Commentaries on economics and technology.
July 21 2011 2:30 PM

Deluded About Debt

How one misleading statistic has made investors, and politicians, irrationally afraid of debt.

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The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditures while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.

The lesson is simple: We should worry less about debt ratios and thresholds and more about our inability to see these indicators for the artificial—and often irrelevant—constructs that they are.

This article comes from Project Syndicate.

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Robert Shiller, professor of economics at Yale University and chief economist at MacroMarkets LLC, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.