Economists rebut, sort of, critique on high-debt, low-growth study

Kenneth Rogoff, right, co-author of a controversial anti-deficit paper, at an International Monetary Fund event in 2002.
(David Scull / Bloomberg News)

Harvard economists Ken Rogoff and Carmen Reinhart, authors of a widely-cited paper suggesting that high government debt levels lead to low growth -- have responded defensively to a new paper suggesting that their results were due to mathematical and software errors. I reported on the controversy, which is burning up the econ wonk world, earlier today.

The original 2010 R & R paper is important because it has provided a scholarly veneer for a wave of fiscal austerity policies around the world, including those coming out of Congress. The paper contended that debt/GDP ratios of 90% or higher sent economic growth off a cliff. Since the U.S. has been around that point, deficit hawks swooped in to argue for sharp spending cuts on things like social programs.


The debunking paper by three University of Massachusetts scholars indicated that, properly calculated and with the R & R data properly encoded in a spreadsheet, the effect was in fact moderate. An excellent chart showing the difference is posted by economist Jared Bernstein here. The “whoops,” obviously, is what you want to look at.

In their response, R & R don’t directly address the UMass critique that their math was erroneous. Instead, they argue that since the critique also finds lower economic growth in high-debt situations, the new findings are no big deal. The point, however, is that the corrected figures don’t show anything like a break point in economic growth at the 90% ratio, which Rogoff and Reinhart cited.

R & R also point readers to a 2012 paper that they say validated their original findings. That paper, however, is more nebulous than they suggest. In it they found lower growth in high-debt-ratio conditions, but it also acknowledged that the high debt was associated with other growth-reducing conditions, including wars, banking crises and depressions. If that sounds like the developed world in 2008-2013, no kidding.

That underscores what has been one of the most frequent critiques of the original paper: Even if high debt/GDP ratios are associated with low growth, what’s the evidence that the former causes the latter? It’s been widely pointed out that it’s just as likely, even more likely, that low growth drives higher government debt, rather than the other way around.


One reason is that lower growth will suppress GDP, thus directly affecting the mathematical ratio. Another is that low growth spurs governments to take on more debt as a recovery tool. Under both rationales, it makes sense to respond to economic slumps with more government spending, not with austerity. That’s where fans of Rogoff and Reinhart, like Rep. Paul Ryan, have gotten things exactly wrong.



The Excel error that ate the recovery

Ryan’s budget would destroy the middle class


Why the rush to cut Social Security and Medicare?