A real Oxford economics interview question — and how I'd coach you through it
I (George Chantry) voice dictated every one of these articles to give my honest, transparent view on economics A-Level tutoring to answer parent questions, having worked in the tutoring industry for nine years. Please WhatsApp me if you want to discuss anything in the articles further or have any further questions.
This is a real question from a past Oxford economics interview. I keep a set of questions that were asked at past Oxford interviews, and this is one of them. What follows is how I coach a student through it in a lesson — a taster of interview preparation.
The question
Here is how the interview runs. They usually fire a series of questions at you. They give you some stimulus material. In this case, they gave a graph showing debt as a percentage of GDP across lots of Western countries, with interest rates. The graph shows debt is very high. First they asked: given interest rates are low and stable, have central banks run out of ammunition? Then, effectively, this question: given government debt is high, have governments run out of ammunition to influence growth through fiscal policy?
Map the question to the right topic area first
When it comes to the interview, it is good to match up interview questions to the right topic area. It is a bit like what we do at A-Level with the question-to-topic mapping problem. So you go: what is the question? How does it map to economic theory? Then you try to give the best-practice textbook solution to the economic theory they ask you about. That is how you nail finals. That is how you get a first in the exam. And that is how you do well at the interview too.
A key aspect of being good is mapping the question onto the right area of the syllabus, and then giving the right solution. This one is fiscal. They say fiscal, so it is going to be about debt. Does debt handcuff the government? The UK has got about £2.9 trillion of debt. The US has got a debt-to-GDP ratio of around 130%. Does that basically stop the government doing expansionary fiscal policy? That is really the essence of the question. This is less technical stimulus — you can lean on your A-Level quite a bit.
Usually, they take something slightly beyond the A-Level. So they are expecting you to have the A-Level sorted, like every other student. Then they expect you to think a little bit further about a kind of university-level problem. They will give you some kind of university-level problem, and they will ask you to think it through from a basic perspective.
The textbook solution is to lay out both sides. On one side is the argument that debt is bad. That is the debt crisis — the Greece problem. On the other side is the argument that debt is not so bad. That is effectively the Blanchard argument: growth means debt can be eliminated in the long run. A good answer covers the debt crisis, covers the issue of growth making debt sustainable, and then gives a conclusion. Who wins? Is it the "debt is terrible" argument, or the "debt is not so bad" argument? Showing the ability to lay out both perspectives, and then pick one, is like summarising a good essay. (This is the same discipline as A-Level revision — see How should my child revise economics, using past papers and model answers?.)
Side one: the debt crisis — the Greece problem
Greece faced a debt-to-GDP ratio of 180%. They had to repay money. Therefore healthcare spending fell by 50%, and education spending fell by 20%. The key problem is the crunch moment, where the government has to pay back a lot of money now. That is where they are in trouble. You want to avoid that crunch moment.
From an A-Level perspective, the standard argument runs like this. If the government runs out of money, taxes have to rise and spending has to be cut, so AD shifts inwards. Then you link it to the government bond argument and bond yields. This is in the A-Level, and it overlaps a lot with exactly how we think about it at university.
International bodies give governments credit ratings, like AAA or BBB. These ratings reflect the risk of government default — the risk the government will not pay back its loans. Default is where the government says: we cannot pay back our loans. That loan is now bad debt. The lender is never going to get the money back. If the credit rating gets worse, lenders believe there is a significant risk of default — a significant risk they lose everything. So lenders set the interest rate, and they want huge compensation for lending to a potentially bankrupt government. The logic is: if the credit rating goes down, lenders increase interest rates in the market. This is the same as in the university modelling. Exactly the same, although at university it is modelled more mathematically.
So interest rates go really high. In the Greek case, bond yields rocketed — the Greek government sometimes had to pay interest rates as high as 100% per year. That means the government's financial position deteriorates massively. And what do lenders do when they see a government in crisis? Do they give the government a break? No — they add salt to the wounds. It is a self-reinforcing cycle. As the government's fiscal position deteriorates, it becomes more likely to go bankrupt. Therefore interest rates go up further.
In the university model, you get two stable equilibria. There is an equilibrium where the government is super safe, and everyone lends to the government at very low rates. And there is another equilibrium where no one will lend to the government at any interest rate, and the whole thing collapses. Either it is cheap and easy to borrow, or it is impossible. There is no middle ground. As the interest rate starts to go up — 10%, 20% in the crisis — it actually precipitates the government's collapse, because people start to believe the government is going to go bankrupt.
What is really interesting about this model — and I remember writing exactly this in finals — is this: when the lenders believe the government will go bankrupt, that is when it actually goes bankrupt. The belief that they will go bankrupt causes them to go bankrupt.
The debt crisis model is a mathematical model at university. It is in Romer's Advanced Macroeconomics (2005) — finals-level material, what you would read in third year. It is a couple of pages of maths and a diagram, with exactly the same logic as this paragraph. Most candidates will not have done that by interview, and that is no problem at all. If you understood this logic, it would be enough for interview. But if you want to really impress, you say: look, I read the Romer material on this.
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Then you bring in the data. Greece faced bond yields over 100%, and a recession of 25% after 2009. To put that in perspective, the COVID recession in the UK was 11%. Greek output contracted by more than double the UK's COVID recession. So this was a serious crisis, and something you really want to avoid. Just remember a couple of stats — that is enough — and then the theory. A really good argument has cogent theory in it, and then here it is happening in the world.
Why did it happen to Greece? Yanis Varoufakis goes into a lot of detail on it. He is an economics professor who was actually the Greek finance minister at the time, and he wrote a whole book about it. The main points are these. Greece did not have its own central bank — it relied on the European Central Bank to be its bank. And it could not control its own interest rate. Greece would have preferred a much more expansionary monetary policy than what the ECB delivered — lower interest rates, much more printing. Second, it is always worse for a government to borrow in a foreign currency, or a currency it cannot print or control. And then the 2008 recession hammered their economy. Growth went down, and the debt looked unsustainable. Those three things in combination did them in.
It is not unheard of for countries to go bankrupt. So it is perfectly reasonable to raise the debt crisis as a problem — it is in modern university books, and the logic we spelled out is exactly the logic in Romer. But there are lots of things going for most governments that make the probability of bankruptcy very low. You can look at it like crossing the road. You might get hit by a car, but it is very unlikely. It is the same with governments and their debt. There is a chance of a debt crisis like Greece, but it is not that likely.
Side two: Blanchard — debt is not so bad
Here is a historical case study we can generalise from. After the Second World War, UK debt was 200% of GDP. That is very high — even higher than the Greece case. But the UK did not end up in a debt crisis. By 2008, the UK had paid all of this debt, and the UK economy had tripled in size. From 1945 to 2008, the debt burden shrank significantly due to growth. So at least over the very long run, debt can be fine.
The key thinker on this is Olivier Blanchard, an MIT professor — the world-class expert on this question. The key condition for Blanchard is G bigger than R. G is the growth rate. R is the real interest rate. Think about the debt-to-GDP ratio as debt divided by GDP.
Governments typically roll over their debt. When the government has to pay interest, it borrows the interest, and uses that to pay the interest. Look at the UK right now: last year, the UK government borrowed an amount very similar to its interest costs. If you borrow the interest cost over time, you are rolling over the debt, and the debt grows by R, the real interest rate. Meanwhile, real GDP grows by G. So if G is bigger than R, the debt-to-GDP fraction shrinks over time. If R is bigger than G, the fraction expands and becomes unstable.
Take the UK after World War II. Debt-to-GDP was two to one — 200%. By 2008, the economy had tripled. So the ratio shrank from 200% to around 60% — without the government having to pay anything back. Those numbers do not require the government to have repaid anything. Blanchard's argument is that historically, growth has always been strong enough that debt became sustainable over the very long run. Even very big debt piles — even the UK's World War II debt, which was historically big. As long as the growth rate exceeds the real interest rate. G bigger than R is the key condition.
It also depends on what the government spends the money on. This is a great point to raise on this interview question. If the government invests in infrastructure, the growth benefits of government spending may outweigh the interest costs. Growth raises taxes, which offsets the spending, and tax rises and spending cuts will not be necessary. That feeds perfectly into the Blanchard modelling. If you can spend money in a way that makes G bigger than R, then debt is fine — "not so bad", in the language of Blanchard.
There is a big policy debate about this. Straight after COVID, people were saying the debt is so bad — who is going to pay it back? But it is interesting to point out that most debt piles are only ever repaid in the very long run. The COVID debt is probably going to be repaid around 2070 or 2080. It is not really paid today. It is going to be rolled over for ages, same as the World War Two debt.
This is a framework I studied in my finals at Oxford. Blanchard has done a series of lectures on this — "debt is not so bad" — and written several papers on it. As long as you understand the G-versus-R point, you have the crux of it, and that will serve you at the interview for sure. I agree the Blanchard side is probably the stronger side. But both sides are very much credible in an interview question on debt sustainability.
How to use this at interview
You will get at least a couple of minutes for each question, and a couple of minutes is quite a while. You can talk about the more advanced modelling for sure. Bring in examples and theory — you should do that. It does not take long to explain that when the risk goes up, the interest rate goes up, and that it is self-perpetuating. That explanation took me about 20 seconds. But it is still a better explanation than most, and it is consistent with the textbook reading. The more you can give fast summaries of the advanced modelling, the better.
Everything you have done at A-Level stays very useful. Interest rates, monetary policy and fiscal policy are bread and butter at A-Level as well. It is not only university material. You always want to concentrate effort on things where you are going to benefit the most.
One thing you definitely do not want is to veer off the question — which I think people do a lot more than they think.
You do not have to be perfect. If you just show interest, understand what it is about, and want to learn more — that is enough. The professor is just looking for people who are talented, interested, and want to learn more. The more steps you can make towards being interested and accomplished in the degree-level material, the better.
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