Debt miracle

Jaume's and my piece on our debt paper is now out over on VOXEU:

Debt miracle: Why the country that borrowed the most industrialised first

Jaume Ventura, Hans-Joachim Voth 27 July 2015

Is debt really that bad? This column looks at the towering debts, rapid tax hikes, and constant state of war that led to Britain’s Industrial Revolution, showing that the devil is in the detail when assessing sovereign debt. When we consider the dangers of debt in today’s world, we should keep an eye on its potential benefits as well.

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Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’.

And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain. Britain’s government debt went from 5% of GDP in 1700 to over 200% in 1820, it fought a war in one year out of three (most of them for little or no economic gain), and taxes increased rapidly but not enough to keep pace with the rise in spending.

Democracy...

After the Greek vote, it is perhaps time to remember why direct democracy isn't always such a brilliant thing (and why most countries' constitutions have clear limits on what people can and cannot vote on). Robin Osborne's brilliant Athens and Athenian Democracy reminds us of the famous episode towards the end of the Peleponnesian war, when Athenian democracy didn't exactly cover itself in glory. In 406 BC, an Athenian fleet defeated its Spartan opponents at the Arginusae Islands; a storm afterwards made it hard for the victors to pick up survivors. What did the Athenian assembly do? It decided to put the generals in charge to death:

"... the insistence on the people's right to do what they wanted regardless of normal procedures (and common justice) was not so much a return to old ways but a travesty of them." (Osborne p. 278)

It was the last sea battle that Athens won.

The tragedy in Greece is that the people who voted "no" have no idea what is about to hit them; you just cannot put decisions such as these to a referendum, given the complete lack of clarity and information about the consequences.