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Originally Published: 4/24/2013



The basis for the Eurozone’s insistence on austerity programs has been a 2010 report by economists Carmen Reinhart and Kenneth Rogoff, Growth in a Time of Debt, which claimed that once a country’s debt exceeds 90% of its gross domestic product (GDP), its economic growth drops off. I questioned this finding since, during World War II, the U.S. debt-to-GDP ratio was about 110% (see The National Debt), and stayed high for quite a while thereafter. But, after the war, the government spent lots and lots of money trying to get the country back on track and we entered an era of extraordinary economic growth.


NOTE: If you don’t want to slog through all this detailed stuff, skip on down to “Summary.”


Shortly after the report’s release, Josh Bivens and John Irons at the Economic Policy Institute refuted Reinhart and Rogoff’s (R&R’s) findings. Recently, new analyses have now pointed out the shoddiness of Reinhart and Rogoff’s (R&R’s) research. In “A World Upside Down? Deficit Fantasies in the Great Recession,” published in the International Journal of Political Economy, authors Thomas Ferguson and Robert Johnson found that R&R had truncated their sample of British data in a way that skewed their conclusions. They eliminated more than a century of data in which British debt loads exploded but economic growth was strong.


More recently “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” was published by the Political Economy Research Institute. These researchers, Thomas Herndon, Michael Ash, and Robert Pollin (HA&P) of the University of Massachusetts-Amherst, were not able to replicate R&R’s results so they asked R&R for their data spreadsheet and R&R agreed. HA&P were then able to see how R&R’s data were constructed. They found 3 main problems. First, R&R made coding errors that excluded high-debt and average-growth countries. Second, that they selectively excluded data. Third, that R&R used unconventional weighting of summary statistics which lead to serious errors that inaccurately represented the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They wrote:

The authors also show how the relationship between public

debt and GDP growth varies significantly by time period and

country. Overall, the evidence we review contradicts

Reinhart and Rogoff’s claim to have identified an important

stylized fact, that public debt loads greater than 90% of GDP

consistently reduce GDP growth.


Reinhart and Rogoff responded to the Herndon, Ash, and Pollin paper (Wall Street Journal), admitting to arithmetic mistakes but arguing that they were careful to distinguish between association and causality. In other words, they still believe that a high debt-to-GDP ratio is associated with lower economic growth, but that they hadn’t proved that a high debt-to-GDP ratio causes lower economic growth. That isn’t the point. The point is which causes which. Mike Konczai stated: “From the beginning many economists (Krugman, Bivens and Irons) have argued that [R&R’s] paper probably has the causation backwards: slow growth causes higher debt.”


Arindrajit Dube, an assistant professor of economics at the University of Massachusetts-Amherst and a colleague of HA&P, took the data set and “reproduced the nonparametric graph . . . using a lowest regression . . .” He then “created similar plots by regressing current year’s GDP on (1) the next 3 years’ average GDP growth, and (2) last 3 year’s average GDP growth. He found that there is “a visible negative relationship between growth and debt-to-GDP, but as HAP point out, the strength of the relationship is actually much stronger at low ratios of debt-to-GDP. This makes us worry about the causal mechanism. After all, while a nonlinearity may be expected at high ratios due to a tipping point, the stronger negative relationship at low ratios is difficult to rationalize using a tipping point dynamic.” [Emphasis added.]


Summary:  Reinhart and Rogoff wrote a paper stating that high debt-to-GDP ratios lead to slow economic growth. Their paper was based on selectively picking data, unconventional weighting of summary data, and coding errors. R&R admitted to some mistakes.


Research can result in one of two possible conclusions. It can show causation, which means that changes in one variable cause changes in the other variable. Or it can show correlation also known as association, meaning only that the two variables relate in some way. There are two kinds of correlation. Positive correlation means that as one variable goes up (or down) the other variable goes up (or down). Negative correlation means that as one variable goes up (or down) the other variable goes down (or up), meaning there is an inverse relationship. Further analysis must be done in order to ascertain if one causes the other.


R&R’s paper only showed a correlation between a debt-to-GDP ratio and economic activity, but the gist of their report was that there was causation, that high debt-to-GDP ratios, especially over 90%, cause a drop in economic activity. This is the message that conservatives all over the world have accepted as gospel, leading to the destructive austerity programs in Europe. Even here in the U.S. politicians have cited this study in efforts to push austerity programs here - like the sequestration agreement we’re all living under now and the budget proposed by Rep. Paul Ryan (R, WI).


HA&P found that, while R&R’s data is inadequate and skewed, they did find a correlation, but results indicate that it is a negative correlation rather than a positive correlation. They found nothing to indicate that a “tipping point” of 90% debt-to-GDP ratio will lead to slower economic activity. Rather than R&R’s conclusion that as debt-to-GDP ratios go up, economic activity goes down, HA&P’s analysis indicated that as economic activity goes down, debt-to-GDP ratios go up. Their results, graphed by Dube, drives this point home because he found that the negative correlation is stronger at low ratios, meaning their is no “tipping point” of 90% as proposed by R&R.


Conclusion:  The reliance on R&R’s erroneous conclusions that high debt-to-GDP ratios dampen economic activity has led banksters in Europe to implement austerity programs which have led to runaway unemployment, reduced citizen aid, and consistent economic depression. The truth of the analysis is the opposite, that low economic activity leads to high debt-to-GDP ratios. Rather than austerity, countries should be doing as they did after World War II - spending more, particularly on infrastructure. The additional spending leads to jobs which lead to increased revenue and less reliance on government programs, which lead to lower debt. As debt is reduced and economic activity is stimulated, the debt-to-GDP ratio decreases.


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