Felix: Chart of the day - Reverse Causality Edition
ThatÂs what youÂre seeing in the charts. Both of them have the same axes: GDP growth on the y-axis, and debt/GDP on the x-axis. Both of them plot the correlations in the dataset, with the dark line being the signal and the dotted lines showing the 95% confidence interval. And just as in the main dataset, the correlations are much clearer at low levels of debt/GDP than they are at higher levels.
But the two charts are different, all the same, especially at levels of debt/GDP above that 90% level. If you look at the left-hand chart, it shows that it really doesnÂt matter how much debt you have: youÂre likely to average about 3% GDP growth a year over the next three years. On the other hand, if you look at the right-hand chart, it shows that the more debt you have, youÂre significantly more likely to have experienced low growth in the past three years.
In other words, the causation here seems about as clear as causal analysis can ever be: low growth causes high debt, rather than high debt causing low growth. Indeed, once you get past 90% of GDP, your debt load doesnÂt seem to have any significant effect on future growth at all!
IOW, R&R got the causality wrong, and ignored the strongest part of their evidence.
Cheers,
Scott.
