Debt, Growth and the Austerity Debate
By CARMEN M. REINHART and KENNETH S. ROGOFF
CAMBRIDGE, Mass.
IN May 2010, we published an academic paper, “Growth in a Time of Debt.”
Its main finding, drawing on data from 44 countries over 200 years, was
that in both rich and developing countries, high levels of government
debt — specifically, gross public debt equaling 90 percent or more of
the nation’s annual economic output — was associated with notably lower
rates of growth.
Given debates occurring across the industrialized world, from Washington
to London to Brussels to Tokyo, about the best way to recover from the
Great Recession, that paper, along with other research we have
published, has frequently been cited — and, often, exaggerated or
misrepresented — by politicians, commentators and activists across the
political spectrum.
Last week, three economists at the University of Massachusetts, Amherst, released a paper
criticizing our findings. They correctly identified a spreadsheet
coding error that led us to miscalculate the growth rates of highly
indebted countries since World War II. But they also accused us of
“serious errors” stemming from “selective exclusion” of relevant data
and “unconventional weighting” of statistics — charges that we
vehemently dispute. (In an online-only appendix accompanying this essay, we explain the methodological and technical issues that are in dispute.)
Our research, and even our credentials and integrity, have been furiously attacked in newspapers and on television.
Each of us has received hate-filled, even threatening, e-mail messages,
some of them blaming us for layoffs of public employees, cutbacks in
government services and tax increases. As career academic economists
(our only senior public service has been in the research department at
the International Monetary Fund) we find these attacks a sad commentary
on the politicization of social science research. But our feelings are
not what’s important here.
The authors of the paper released last week — Thomas Herndon, Michael
Ash and Robert Pollin — say our “findings have served as an intellectual
bulwark in support of austerity politics” and urge policy makers to
“reassess the austerity agenda itself in both Europe and the United
States.”
A sober reassessment of austerity is the responsible course for policy
makers, but not for the reasons these authors suggest. Their conclusions
are less dramatic than they would have you believe. Our 2010 paper
found that, over the long term, growth is about 1 percentage point lower
when debt is 90 percent or more of gross domestic product.
The University of Massachusetts researchers do not overturn this
fundamental finding, which several researchers have elaborated upon.
The academic literature on debt and growth has for some time been
focused on identifying causality. Does high debt merely reflect weaker
tax revenues and slower growth? Or does high debt undermine growth?
Our view has always been that causality runs in both directions, and
that there is no rule that applies across all times and places. In a paper
published last year with Vincent R. Reinhart, we looked at virtually
all episodes of sustained high debt in the advanced economies since
1800. Nowhere did we assert that 90 percent was a magic threshold that
transforms outcomes, as conservative politicians have suggested.
We did find that episodes of high debt (90 percent or more) were rare,
long and costly. There were just 26 cases where the ratio of debt to
G.D.P. exceeded 90 percent for five years or more; the average high-debt
spell was 23 years. In 23 of the 26 cases, average growth was slower
during the high-debt period than in periods of lower debt levels.
Indeed, economies grew at an average annual rate of roughly 3.5 percent,
when the ratio was under 90 percent, but at only a 2.3 percent rate, on
average, at higher relative debt levels.
(In 2012, the ratio of debt to gross domestic product was 106 percent in
the United States, 82 percent in Germany and 90 percent in Britain — in
Japan, the figure is 238 percent, but Japan is somewhat exceptional
because its debt is held almost entirely by domestic residents and it is
a creditor to the rest of the world.)
The fact that high-debt episodes last so long suggests that they are
not, as some liberal economists contend, simply a matter of downturns in
the business cycle.
In “This Time Is Different,” our 2009 history of financial crises over
eight centuries, we found that when sovereign debt reached unsustainable
levels, so did the cost of borrowing, if it was even possible at all.
The current situation confronting Italy and Greece, whose debts date
from the early 1990s, long before the 2007-8 global financial crisis,
support this view.
http://www.nytimes.com/2013/04/26/opinion/debt-growth-and-the-austerity-debate.html?nl=todaysheadlines&emc=edit_th_20130426
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