Finding A New Macroeconomics: (8) Reinhart, Rogoff, and Reality

Economics has been under fire since the recent crisis for enshrining abstract models that offer little connection to the real world. In “Growth in a Time of Debt,” our data-intensive approach aims at providing stylised facts, well beyond selective anecdotal evidence, on the contemporaneous link between debt, growth, and inflation at a time in which the world[‘s] wealthiest economies are confronting a peacetime surge in public debt not seen since the Great Depression of 1930s and indeed virtually never in peacetime. As Paul Krugman (2009) observed, “they’ll (the economists) have to do their best to incorporate the realities of finance into macroeconomics.” One might add as a corollary, however, that such discipline is especially needed when those realities are inconvenient to strongly held opinions. — Carmen M. Reinhart and Kenneth Rogoff [1]

Carmen Reinhart and Kenneth Rogoff sparked a huge controversy with their study “Growth in a Time of Debt” (GITD), released in January 2010. The study tested, for many countries over many years, the correlation between “public debt as a percent of GDP” (the “PD/GDP ratio”) and overall growth. When they released their study, Reinhart and Rogoff contended it showed that when the PD/GDP ratio reaches 90%, economic growth suddenly and substantially declines. Fiscal conservatives quickly seized upon this result to argue that, because this “tipping point” has been reached in the United States, the Reinhart/Rogoff study supports “austerity” budgeting for the federal government. In other words, they argue, although reduced spending directly reduces growth, at such a high level of public debt reduced spending suddenly increases growth. 

Although heralded by austerity advocates, the study at first did not get a great deal of media or professional attention. However, three years later, in April 2013, GITD was challenged on statistical grounds by a U. Mass. graduate student and his faculty advisors, who asserted that when errors they found in the study are corrected the finding that growth declines at high levels of public debt is invalidated. GITD suddenly become the object of widespread academic, political, and media attention. If there is no sudden downward pressure on growth at the 90% public debt/GDP ratio, critics argue, there is no economic case for “austerity.”             

Overview of This Discussion 

If there seems to be something strange about their thesis, your instincts are good. Their unusual thesis certainly deserved all the scrutiny it has received, and more. Facts don’t lie, but people can create and spread falsehoods by misinterpreting facts or misleadingly representing them. The “science” of economics is a fertile field for such practices, especially with the interests of wealth and income so intimately involved with economic policy.

The quotation is from an article published by Reinhart and Rogoff in August of 2010, shortly after their study’s conclusions were rejected by two mainstream economists who found “several theoretical and empirical flaws of the GITD approach and findings, especially as they relate to the U.S. economy” and warned that “policymaking based on the findings of GITD would be deeply unwise.” [2]  

For Reinhart and Rogoff, so quickly after this rebuttal, to call for “discipline” when “realities are inconvenient to strongly held opinions” should set off some alarm bells. Because, as they remind us, reality is what ultimately matters, no one’s personal integrity ever needs to be called into question. It is possible that no participant in this complex debate is completely right or wrong, especially if Reinhart and Rogoff are correct that the controversy stems from differences in “strongly held opinions.” But the proposition cannot be both true and untrue, so at least someone is ignoring or misperceiving factual reality.   

The controversies over the GITD study have been fascinating and revealing. This topic involves basic ideas about how economies work, and its importance cannot be overstated: A proper understanding of the implications of macroeconomics for government policies is crucial to the future of modern market economies. In this series of posts, we have learned that growing income and wealth inequality over the last three decades has severely depressed overall growth in the United States.  It is imperative, therefore, to review both stages of the Reinhart/Rogoff controversy in depth. This topic will be covered in a series of three posts:

1. This post focuses on (a) Reinhart and Rogoff’s claims about GITD’s approach and findings, (b) critiques of GITD made by other economists, and (c) GITD’s strengths and weaknesses;

2. The second post reviews the connection between the Reinhart/Rogoff study and economic “ideologies,” in particular the supply-side ideas known as “Trickle-Down” and the “Austerity doctrine.” Ideologies are distinguished from real science in that they are based on wishful thinking, and tend to ignore inconvenient facts. This post attempts to clear the field of such fantasy, so that reality can be identified without misleading or destructive distractions;       

3. The third post discusses the limitations of the debate as framed within the confines of neoclassical economics, which ignores the implications of growing inequality and the effects of income and wealth concentration on growth. Because facts are facts, we will examine whether the Rogoff/Reinhart database, as corrected, supports the conclusion that higher levels of public debt have progressively higher negative effects on growth through the mechanism of wealth and income distribution, throughout the entire range of PD/GDP ratios. Properly utilized, the Reinhart/Rogoff database might help develop crucial information about inequality growth and the extent of damage it has caused.    

Reinhart/Rogoff  (2008-2009)

Reinhart and Rogoff have been working together for many years, painstakingly gathering data and conducting detailed studies of the history of financial crises. In 2009, they published a book, This Time Is Different, and in March 2008 a working paper entitled “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises.” [3] Here is their description in the working paper of the nature of their work and their conclusions:

This paper offers a detailed quantitative overview of the history of financial crises dating from the mid-fourteenth century default of Edward III of England to the present subprime crisis in the United States. Our study is based on a comprehensive new statistical dataset compiled by the authors that covers every region of the world and spans several centuries. Inevitably, a database of this scale and scope, involving so many primary and secondary historical sources (that do not always agree), will contain some errors and omissions, despite our best efforts* * *

Our principle aim here has been to illustrate some core features of this sweeping database, trying to bring out a few fundamental regularities. We are fully aware that, in such a broad synthesis, we are inevitably obscuring important nuances surrounding historically diverse episodes. With these caveats in mind, this “panoramic” quantitative overview has revealed a number of important facts. First and foremost, we illustrate the near universality of episodes of serial default and high inflation in emerging markets, extending to Asia, Africa, and until not so long ago, Europe. We show that global debt crises have often radiated from the center through commodity prices, capital flows, interest rates, and shocks to investor confidence. We also show that the popular notion that today’s emerging markets are breaking new ground in their extensive reliance on domestic debt markets, is hardly new.

This brings us to our central theme—the “this time is different syndrome.” There is a view today that both countries and creditors have learned from their mistakes. Thanks to better-informed macroeconomic policies and more discriminating lending practices, it is argued, the world is not likely to again see a major wave of defaults. Indeed, an often-cited reason these days why “this time it’s different” for the emerging markets is that governments there are relying more on domestic debt financing. Such celebration may be premature. Capital flow/default cycles have been around since at least 1800 — if not before. Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant.  [4]

In effect, they argue, their study shows that financial history has consistently repeated itself because human behavior has not changed enough even in these modern times to produce a different result. Such findings are certainly credible and, indeed, in the broader context of human history hardly seem surprising. More specifically, though, they suggest that in emerging markets increasing government reliance on “domestic debt financing” is not likely to solve the “serial default and high inflation” problem. That issue is not applicable to the United States.

 “Growth in a Time of Debt” (2010-2011)

Importantly, with GITD Reinhart and Rogoff veered away from this more generalized econometric history into an important area of theoretical macroeconomics. The “concluding remarks” in their report offers these as their principal findings:

Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. In addition, for emerging markets, there appears to be a more stringent threshold for total external debt/GDP (60 percent) that is also associated with adverse outcomes for growth. [5]

The core feature of GITD is its correlation of data over many years among groups of countries. The isolated study of data for the United States also attracted considerable  attention.  This graph [6] shows their specific results for the United States:

us govt debt growth and inflation

For the United States, the rates of inflation and growth were not found to be significantly correlated with PD/GDP ratios except when they exceeded 90%.  That occurred in the U.S. just after WW II when GDP was declining simultaneously with relatively high inflation (a phenomenon often called “stagflation”).  In their August 11, 2010 report they emphasized, with reference to the entire reported group of advanced countries:

[I]t is evident that there is no obvious link between debt and growth until public debt exceeds the 90% threshold. (Original emphasis.) [7]

For emerging markets, they found that “annual growth declines by about two percent” when gross external debt (public and private) reaches 60% of GDP, and that “for levels of external debt in excess of 90 percent of GDP, growth rates are roughly cut in half.” [8] However, they said that because of data limitations: “We are not in a position to calculate separate total external debt thresholds (as opposed to public debt thresholds) for advanced countries.”  And they added:

For the five countries with systemic financial crises (Iceland, Ireland, Spain, the United Kingdom, and the United States), average debt levels are up by about 75 percent, well on track to reach or surpass the three year 86 percent benchmark that Reinhart and Rogoff (2009a,b) find for earlier deep post-war financial crises. [9]

“Surprisingly,” they concluded, “the relationship between public debt and growth is remarkably similar across emerging markets and advanced economies.” Further: “Our main result is that whereas the link between growth and debt seems relatively weak at ‘normal’ debt levels, median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Thus, for all studied countries they found no strong link between public debt and growth below the 90 percent PD/GDP ratio, and:

We find no systematic relationship between high debt levels and inflation for advanced economies as a group (albeit with individual country exceptions including the United States).  By contrast, inflation rates are markedly higher in emerging market countries with higher public debt levels. [10]

My Review


Their initial report in Working Paper 15639 raised some of the kinds of concerns I occasionally encountered during my career in evaluating policy recommendations based on statistical analyses. The way Reinhart and Rogoff presented their case raised an initial red flag: They chose to emphasize up front that their approach is “decidedly empirical,” using “a broad new historical data set on public debt (in particular, central government debt)” to incorporate “data on forty-four countries spanning about two hundred years.” This emphasis on the empirical nature of their study and their determination of “stylized facts” seemed to anticipate some of the criticism their report might eventually receive.

An Over-Emphasis on Econometric Results

As noted above, the opening quotation is from an article published in August of 2010, eight months after the authors released GITD and one month after John Irons and Josh Bivens published their critique in a briefing paper for the Economic Policy Institute (EPI), discussed below. [11] In this rejoinder, Reinhart and Rogoff aggressively advocated for the preeminence of statistical analysis: Note that in the space of single paragraph, “stylized facts” are elevated to the status of “realities.” Here is a definition of “stylized fact” from Wikipedia:

In social sciences, especially economics, a “stylized fact” is a simplified presentation of an empirical finding. A stylized fact is often a broad generalization that summarizes some complicated statistical calculations, which although essentially true may have inaccuracies in the detail. [12]

The principal stylized fact represented by their study is the 90% PD/GDP ratio “tipping point” above which economic growth begins sharply to decline. “Inaccuracies in the detail” became a significant concern for GITD in April of 2013 when a graduate student and his faculty advisers published findings of statistical errors which invalidated this “stylized fact.”  But if the explanation for a stylized fact is misperceived, oversimplified, or illogical, even without inaccuracies in the detail, the stylized fact may not be essentially true. Here is where it becomes crucial to illuminate the connection between, as Reinhart and Rogoff put it, “abstract models” and “the real world.” 

It does appear from the study, certainly from the results for the United States, that there is at least a modest correlation between growth and public debt over a broad range of PD/GDP ratios. But that does not necessarily mean there is any special causal link between the amount of U.S. public debt, which has reached more than $16.7 trillion since it began to grow some 35 years ago, and the overall rate of growth. High levels of public debt certainly should concern us, because of the high interest costs required for debt service and potentially reduced government credit.  But how high is too high? And why (and how) would the level of production and output be affected? 

The Relationship of Public Debt to Growth

Most of the major issues in macroeconomics involve the determinants of growth, and there are many factors influencing growth, so for a high ratio of public debt to GDP to be the overriding factor in any particular set of circumstances, much less consistently so, is an unusual and seemingly far-fetched proposition. Nonetheless, the authors provided only a couple of unexplained citations to possible explanations for high public debt negatively affecting growth; and there was no mention of potential offsetting positive influences of public debt on growth, such as the stimulus from government spending.

Nor did the authors discuss how the use of centuries of historical data helps to explain what is happening today. It seemed to me that, especially spanning all of these countries over all of these years and in all sorts of circumstances, some universal factor that might make public debt the consistent enemy of growth must be identified before it can reasonably be hypothesized that the 90% PD/GDP ratio is a causal tipping point at which significantly lower growth consistently kicks in. With none identified, it was not surprising that the empirical analysis failed to detect the existence of any such factor at any PD/GDP ratios below 90%.

It was surprising, therefore, to see these economists imply, without careful explanation, that such a factor does indeed exist. I looked for such an explanation in the section “Debt, Growth, and Inflation” [13] but found only an off-hand reference to what they called the “simplest” connection between public debt and growth, said to be found in “Robert Barro (1979)”:

Assuming taxes ultimately need to be raised to achieve debt sustainability, the distor- tionary impact . . . is likely to lower potential output. Of course, governments can also tighten by reducing spending, which can also be contractionary. [14]

This brief description of Barro’s thesis, if that’s what it is, is hazy at best. What distortionary impact? Are they referring to the “trickle-down” idea that any tax increase reduces demand? They don’t say. Moreover, in citing the contractionary effect of reduced government spending, they identify “austerity” policy itself as a main cause of declining  growth in response to rising public debt. Regardless, the cited Barro study presents a complex theory about the choice between taxation and public borrowing that, I suggest, mere mortals should not be asked to try to wade through[15] When articles like that are cited, even to other economists, plain-English explanations of any credible arguments are mandatory.

One possible explanation for the thin development of this core point is that Reinhart and Rogoff believe it is already already generally accepted among economists that danger lurks (for whatever reason) as the PD/GDP ratio grows. In a recent Oped, for example, Paul Krugman, in the course of arguing that budget deficits are not an immediate concern for the U.S., maintained:

Bear in mind that the budget doesn’t have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy. [16]

For whatever reason, the authors did not begin discussing these basic questions until they got to their “concluding remarks,” and the discussion there was less than reassuring:

Why are there thresholds in debt, and why 90 percent? This is an important question that merits further research, but we would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of “debt intolerance” in Reinhart, Rogoff, and Savastano (2003). As we argued in that paper, debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity analysis. A general result of our “debt intolerance” analysis, however, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs. [17]

It is certainly understandable that as a government substantially increases its borrowing it could use up its available sources of credit, a point no doubt reflected in Krugman’s argument that public debt should (at some point) be constrained to stop growing as a percent of GDP; but Krugman left the “debt limit” question open, and appeared to fudge it with his references to “cyclically adjusted” deficits (which assume full employment, an entirely unrealistic assumption today).

Importantly, Reinhart and Rogoff conceded they had no explanation for the apparent 90% threshold, and their brief discussion raised other questions as well: What might we learn from a further “sensitivity analysis” of their own self-generated “four broad debt groupings”? And if debt thresholds are “importantly country-specific,” how could they base meaningful conclusions on a statistical analysis correlating data from 44 countries over two centuries? Again, this isn’t just about number crunching: a plausible explanation of causality is crucial. The hypothesis that “debt intolerance” increases at high debt levels seems eminently sensible (there is only a finite amount of available credit, even for the world’s leading economy), but that does not imply that the level of debt directly affects the level of growth in a meaningful way.     

More red flags popped up when I saw that the authors soon began to speculate publicly about the policy implications for the U.S. of findings that their study had failed to make:

One need look no further than the stubbornly high unemployment rates in the US and other advanced economies to be convinced how important it is to develop a better understanding of the growth prospects for the decade ahead. We have presented evidence – in a multi-country sample spanning about two centuries – suggesting that high levels of debt dampen growth. One can argue that the U.S. can tolerate higher levels of debt than other countries without having its solvency called into question. That is probably so.  [18]

Thus, having raised in WP15639 (and elsewhere) the specter of rising “debt intolerance,” they then suggested here (in August of 2010) that the U.S. can probably tolerate higher levels of debt than other countries, but not without concern for the specter of “having its solvency called into question.”

Overall, I found the Reinhart/Rogoff presentation in WP15639, even when it does not digress into obscurantism or innuendo, too casual and overreaching. At no point did they significantly address the underlying issue – the alleged relationship of public debt to growth. Had they argued simply that when governments borrow excessively, additional borrowing eventually becomes prohibitively costly, their position would not likely have engendered a lot of controversy. But the argument of GITD, that high public debt causes declining growth, would have been superfluous to that argument; so why try to establish that particular stylistic fact, except to find a potential rationale for the austerity doctrine? We’ll return to that question in the next post.   

The AER Article

Four months after WP15639 was published in January of 2010, Reinhart and Rogoff published a very similar article in the May issue of the American Economic Review. [19] It was basically an edited version of WP15639, but the focus had shifted: The graph and associated discussion of the isolated U.S. data, which was soon to be the subject of the EPI’s briefing paper (discussed next), was gone.  This second article focused solely on the multi-country regression results.  The reference to “Robert Barro (1979)” in WP15639 was  missing, as were the open questions raised in the WP15639 concluding remarks.

The AER article failed to advance their discussion of the relationship between public debt and growth. They reemphasized their complete reliance on empirical data, and reaffirmed that they “will not attempt to determine the genesis of debt buildups but instead simply look at their connection to average and median growth and inflation outcomes.” [20] They  conceded, nonetheless, that the genesis of buildups could be important:

In principle, the manner in which debt builds up can be important. For example, war debts are arguably less problematic for future growth and inflation than large debts that are accumulated in peacetime. Postwar growth tends to be high as wartime allocation of manpower and resources funnels to the civilian economy. Moreover, high wartime government spending, typically the cause of the debt buildup, comes to a natural close as peace returns. In contrast, a peacetime debt explosion often reflects unstable political economy dynamics that can persist for very long periods. [21]

Here, their retreat from discussing the country-specific case of the United States is noteworthy. The manner in which U.S. public debt has developed could be of paramount importance, but Reinhart and Rogoff ignore the U.S. public debt history: Post-WW II debt was reduced and nearly eliminated over the period from 1946 to 1980, the year when America’s “peacetime debt explosion” began in the Reagan Administration. Nowhere have they offered any suggestion of what “unstable political economy dynamics” might have caused the run-up of more than $16 trillion of public debt in the U.S. over the past three decades. That topic begs for analysis, and we will get to it in the third of these three posts.


Undoubtedly, extremely high levels of public or total debt present problems for any nation. However, Reinhart and Rogoff have identified no theoretical basis for a causal relationship between rising public debt and declining growth. The depth of their database is their study’s strong suit, but their “decidedly empirical” approach eschews causality, assigning supreme value to their econometric results without identifying plausible explanations for them, or refining their analysis to try to account for factors they concede are important, such as the genesis of debt. 

The EPI Review

The critique of GITD by John Irons and Josh Bivens was published by EPI in July of 2010. They maintained that the GITD approach and findings contained “several theoretical and empirical flaws. . . , especially as they relate to the U.S. economy,” and argued that “the GITD ‘90% threshold’ for gross government debt should not be used as a guide for U.S. fiscal policy, as both the theory and the data in the paper rest on exceptionally shaky foundations.” [22] These were their main concerns:

1. GITD makes no allowance for a more complicated dynamic relation between growth and debt, and there “is no compelling theoretical reason why the stock of debt at a given point in time should harm contemporaneous economic growth”;

2. The empirical findings are not likely to be relevant to today’s U.S. economy. “In particular, the United States economy has only exceeded the 90% threshold in six of the 218 years examined in the GITD paper, and these six years are constituted by a single consecutive time-span in the 1940s dominated by the defense buildup and subsequent demobilization around World War II”;

3. No evidence on causality is given, and “contemporaneous causality is more likely to run in the opposite direction, that is, “from slow growth to high debt levels”;

4. The GITD paper “is only able to base its conclusion on an analysis of gross debt rather than the more appropriate measure, public debt. The debt that is economically relevant is the debt held by the public [i.e., excluding “intra-governmental holdings”].

To illustrate the second point, the authors presented the following diagram plotting U.S. growth and debt levels taken from the GITD database. They argued that such economic decline only occurred in the 1945-1947 period, when there was an “historically unprecedented withdrawal of government spending.”  [23]

growth and debt EPI

This point underscores the need for a qualitative review of an empirical result to determine whether it actually supports a generalized proposition or is merely the product of special or unique circumstances. 

“Growth in a Time of Debt” (2013)

With all of this in the background, along came Herndon, Ash and Pollin two months ago (April of 2013)  to inform us that Reinhart and Rogoff had made econometric mistakes that invalidated their main conclusion; that is, their own corrected results do not suggest a material decline in growth at high levels of public debt. [24] For the sake of argument, they accepted the premise that causation runs from the level of public debt to growth, not the other way around.  However, they maintained:

A necessary condition for a stylized fact is accuracy. We replicate RR and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and growth among these 20 advanced economies in the post-war period. Our most basic finding is that when properly calculated, the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0.1 percent as RR claims. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when public debt/GDP ratios are lower.

We additionally refute the RR evidence for an “historical boundary” around public debt/GDP of 90 percent, above which growth is substantively and non-linearly reduced. In fact, there is a major non-linearity in the relationship between public debt and GDP growth, but that non-linearity is between the lowest two public debt/GDP categories, 0-30 percent and 30-60 percent, a range that is not relevant to current policy debate. [25] 

Obviously, this was a major development.  On April 16, 2013, Reinhart and Rogoff responded in the Wall Street Journal:

We literally just received this draft comment, and will review it in due course. On a cursory look, it seems that Herndon Ash and Pollen also find lower growth when debt is over 90% (they find 0-30 debt/GDP, 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%; 90-120, 2.4%; and over 120, 1.6%). These results are, in fact, of a similar order of magnitude to the detailed country by country results we present in table 1 of the AER paper, and to the median results in Figure 2. And they are similar to estimates in much of the large and growing literature, including our own attached August 2012 Journal of Economic Perspectives paper (joint with Vincent Reinhart). However, these strong similarities are not what these authors choose to emphasize. * * *

The 2012 JEP paper largely anticipates and addresses any concerns about aggregation (the main bone of contention here). The JEP paper not only provides individual country averages (as we already featured in Table 1 of the 2010 AER paper) but it goes further and provide episode by episode averages. Not surprisingly, the results are broadly similar to our original 2010 AER table 1 averages and to the median results that also figure prominently. It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign. [26]

On April 29, Ash and Pollin in a New York Times Oped, discussed their joint report with Thomas Herndon, and the Reinhart/Rogoff response to it:

We identified a spreadsheet coding error — which Ms. Reinhart and Mr. Rogoff promptly acknowledged — that affected their calculations of growth rates for big economies since World War II. We also asserted that the two of them erred by omitting some data and improperly weighting other statistics. In an Op-Ed essay and appendix last week, Ms. Reinhart and Mr. Rogoff denied those accusations.

They referred to this debate as an “academic kerfuffle,” but we believe the debate has been constructive, because it has brought greater clarity over the ideas shaping austerity policies in both the United States and Europe.

The most important insight for anyone following this debate, and one that Ms. Reinhart and Mr. Rogoff acknowledge, is that there is no evidence supporting the claim that countries will consistently experience a sharp decline in economic growth once public debt levels exceed 90 percent of G.D.P. Although the two of them partly backed away from that claim in a 2012 paper in The Journal of Economic Perspectives, they have now done so more definitively, saying the 90 percent figure is not “a magic threshold that transforms outcomes, as conservative politicians have suggested.”

However, Ms. Reinhart and Mr. Rogoff stubbornly maintain that “growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product,” a core finding of their 2010 paper.

There are serious problems with this claim. The most obvious is that the median growth figures they reported in the 2010 paper are distorted by the same coding error and partial exclusion of data from Australia, Canada and New Zealand that tainted their average growth figures. When we corrected for these errors, the difference in median economic growth rates was only 0.4 percentage points between countries whose public-debt-to-G.D.P. ratio was between 60 percent and 90 percent, and those where the ratio was over 90 percent (2.9 percent median growth, versus 2.5 percent). The difference between 0.4 percent and 1 percent is quite substantial when we’re talking about national economic growth. [27]

Reinhart and Rogoff have  since conceded that the correction invalidated the conclusion of a rapid decline in growth above a 90% PD/GDP ratio, but they emphasized that their corrected study does show a tendency for growth to decline as PD/GDP rises. [28]

The Conservative Reaction

Conservatives seized on GITD as support for reducing budget deficits and cutting government spending. U.S. Representative Paul Ryan, for example, advanced this argument in both the FY 2012 and FY 2013 House Budget Resolutions:

The economic effects of a debt crisis on the United States would be far worse than what the nation experienced during the financial crisis of 2008. * * * Absent a bailout, the only solutions to a debt crisis would be truly painful: massive tax increases, sudden and disruptive cuts to vital programs, runaway inflation, or all three. * * * Even if high debt did not cause a crisis, the nation would be in for a long and grinding period of economic decline. A well known study completed by economists Ken Rogoff and Carmen Reinhart confirms this common sense conclusion.

The study found conclusive empirical evidence that gross debt (meaning all debt that a government owes, including Debt held in government trust funds) exceeding 90 percent of the economy has a significant negative effect on economic growth. This is bad news for the United States, where gross debt exceeded 100 percent of GDP last year. The study looked specifically at the United States, focusing on growth and inflation relative to past periods when this Nation has experienced high debt levels. Not only is average economic growth dramatically lower when gross U.S. debt  exceeds 90 percent of the economy, but also inflation becomes a problem.

Essentially, the study confirmed that massive debts of the kind the nation is on track to accumulate are associated with “stagflation” (– a toxic mix of economic stagnation and rising inflation.) [29] 

Of course, this argument was written before the recent econometric refutation of the Reinhart/Rogoff thesis, which they have affirmed; still, despite much public attention to Paul Ryan’s reliance on Reinhart/Rogoff, there has been no repudiation of that reliance that I am aware of.  

Our work is not done, however: There is an important fallacy in citing Reinhart/Rogoff for fiscal “austerity” that we must not overlook. Even if GITD had demonstrated that high growth consistently declines significantly at high levels of public debt, that would not have meant mean that curtailing government spending will improve growth. “Austerity” cuts in government programs directly cause lower growth and government revenue, causing the PD/GDP ratio  to increase markedly (both by reducing GDP and by increasing debt). 

Moreover, we have seen no evidence of any mechanism for independent growth promotion from cutting government spending, which is the unsubstantiated premise of the “austerity doctine.” And Ryan’s reliance on GITD always contained a fatally circular argument: Instead of “conclusively” demonstrating that high public debt has a severe impact on growth, as he alleged, Reinhart and Rogoff relied mainly — as expressed in the reference to “Barro (1979)” in connection with causality — on the prospect of growth declining as a result of austerity budgeting in response to high debt. [30]

The argument in the House Budget Resolution is, in any event, disingenuous: Massive spending cuts and massive tax increases, along with the prospect of “runaway inflation” are Paul Ryan’s complete list of the tragic consequences of a “debt crisis.” But his budget proposals already include massive spending cuts, along with additional tax reductions for corporations and the wealthy (a top rate of 25% instead of the current 40%), making any “debt crisis” a crisis for the bottom 99%. Thus, Paul Ryan’s reference to GITD is merely a scapegoat for austerity. The “Blueprint for American Renewal” is an illusion; Paul Ryan’s argument makes it clear that even he is aware that he’s not offering the bottom 99% a “path to prosperity.”


This brings us to the topic of the next post in this series – ideology.  As Reinhart and Rogoff have confirmed, basic facts and logic inform us that “austerity,” reduced government spending, constitutes a direct reduction of overall economic activity and growth. Paul Ryan’s interpretation of the import of the uncorrected GITD is, therefore, inherently wrong. Look at it this way: Ryan’s argument requires that whatever factors cause growth to fall at high levels of public debt (and remember, none have been identified) are so powerful that cutting government spending to reduce the PD/GDP ratio will enhance growth more than enough to offset the direct reduction in growth inherent in the budget cuts themselves. This fanciful thinking is, of course, baseless; it is reminiscent of the trickle-down argument, discussed in the next post, that tax increases on top incomes “pay for themselves.”

Ryan is offering America a “double whammy” — reduced growth through increasingly regressive federal taxation, and reduced growth through further reductions in government spending. Insufficiently progressive taxation has already reduced growth substantially and led the United States into a depression; the Ryan plan is a likely death sentence for the American economy.

My next post in this series will explain in greater detail why this is true. When we dig a little deeper, we can see that the Reinhart/Rogoff thesis is actually predicated on an ideological foundation, and is therefore wrong.  That is not to say that high levels of public debt are not problematic — they are. But the notion that high debt levels directly reduce growth is an ideological construct, and framing the problem as Reinhart and Rogoff did only causes confusion, leading inevitably to the disproof of their thesis by their own data. (Yes, that is what has happened.) 

Only Reinhart and Rogoff can identify their own “strongly held opinions.” When all is said and done, however, outcomes are controlled by reality, not ideology. With ideological issues cleared up, we can begin to understand what their data really mean, and come to grips with the real relationship between public debt and growth.    

JMH – 6/5/2013 (edited 6/6,21, and 27,29/2013)


[1] “Debt and Growth Revisited,” by Carmen M. Reinhart and Kenneth Rogoff, VOX, August 11, 2010 (here).

[2]  “Government Debt and Economic Growth: Overreaching Claims of Debt ‘Threshold’ Suffer from Theoretical and Empirical Flaws,” by John Irons and Josh Bivens, Economic Policy Institute, Briefing Paper #271, July 26, 2010, pp. 1-2 (here).

[3] Karmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, 2009 (here), a book translated into 20 languages; “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises,” by Reinhart and Rogoff, National Bureau of Economic Research, NBER WP13882, March 2008 (here).

[4] WP13882, pp. 51-53.

[5] “Growth in a Time of Debt,” by Carmen M. Reinhart and Kenneth Rogoff, National Bureau of Economic Research (NBER), WP15639, January 2010 (here), pp. 22-23.

[6] Id. at 10.

[7] “Debt and Growth Revisited,” supra.

[8] WP15639, p. 3.

[9] Id. at 4.

[10] Id. at 2-3.

[11] “Government Debt and Economic Growth: Overreaching Claims of Debt ‘Threshold’ Suffer from Theoretical and Empirical Flaws,” by John Irons and Josh Bivens, Economic Policy Institute, Briefing Paper #271, July 26, 2010, pp. 1-2 (here).

[12] “Stylized fact,” Wikipedia (here).

[13] WP15639, p. 6.

[14] The reference appears to be to “On the Determination of the Public Debt,” by Robert J. Barro, Journal of Political Economy, University of Chicago Press, 1979 (here), Harvard DASH download (here).

[15] Here’s the basic description by Barro of his work: “This paper develops a simple theory of ‘optimal’ public finance that identifies some factors that would influence the choice between taxes and debt issue. The model accepts the Ricardian invariance theorem as a valid first-order proposition but introduces some second-order considerations involving the ‘excess burden’ of taxation to obtain a determinate (optimal) amount of debt creation. It should be stressed that some typical features of public debt analysis, such as shifting of the tax burden to future generations, crowding out of private investment, etc., are excluded by the assumption that the Ricardian proposition is valid on the first order” (p. 941).

[16] “Dwindling Deficit Disorder,” by Paul Krugman, The New York Times, Oped, March 10, 2013 (here).

[17] WP15639, supra, p. 23.

[18] “Debt and Growth Revisited,” supra.

[19] “Growth in a Time of Debt,” by Carmen M. Reinhart and Kenneth S. Rogoff, American Economic Review, Papers & Proceedings (100), May 2010, pp. 573-578.

[20] Id. at 574.

[21] Ibid.

[22] “Government Debt and Economic Growth: Overreaching Claims of Debt ‘Threshold’ Suffer from Theoretical and Empirical Flaws,” by John Irons and Josh Bivens, Economic Policy Institute (EPI), Briefing Paper #271, July 26, 2010, supra, pp. 1-2 (here).

[23] Id. at 1-2, 4-5, 7.

[24] “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” by Thomas Herndon, Michael Ash, and Robert Pollin, Political Economy Research Institute (PERI), U. Mass. Amherst, April 2013 (here).

[25] Id. at pp. 2-3.

[26] “Reinhart-Rogoff Response to Critique,” Real Time Economics, The Wall Street Journal, April 16, 2013 (here).

[27] “Debt and Growth: A Response to Reinhart and Rogoff,” by Robert Pollin and Michael Ash, The New York Times, April 29, 2013 (here). A description of the errors and their correction is provided in “Paul Ryan Budget: The Austerity Paper He Cites is Full Of Holes,” Policymic (here).

[28] “REINHART AND ROGOFF: ‘Full Stop,’ We Made A Microsoft Excel Blunder In Our Debt Study, And It Makes A Difference,” by Joe Weisenthal, Business Insider, April 17, 2013 (here).

[29] “The Path to Prosperity: A Blueprint for American Renewal,” by Paul Ryan, FY 2013 House Budget Resolution, p. 80 (here) (Emphasis added); “The Path to Prosperity: Restoring America’s Promise,” by Paul Ryan, FY 2012 House Budget Resolution, p. 21 (here).

[30] WP15639, supra, p. 6.

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