One of the most influential findings in the never-ending debate over American fiscal policy came from a 2010 paper by economists Carmen Reinhart and Kenneth Rogoff—“Growth in a Time of Debt.” They claimed to have identified a clear debt ratio (total public debt divided by gross domestic product) threshold above which countries’ economic growth would significantly slow. This 90 percent debt ratio has been referenced by budget writers, policymakers and others arguing for steep reductions in budget deficits soon.
We didn’t buy it. In the same year their paper was released, I co-authored a paper (along with John Irons) looking at the historical record for the U.S., and found very little evidence that such a threshold existed (and we weren’t alone in our skepticism). Further, we noted that the causality of any such finding was deeply in doubt—slow growth could lead to high debt as surely (actually, much more surely) as high debt could impede growth.
Most importantly (if not most thrillingly), we argued (in the first bullet-point!) that “there is no compelling theoretical reason why the stock of debt at a given point in time should harm contemporaneous economic growth.”
And it turns out that there is no longer any compelling empirical reason to think that the 90 percent threshold is operable any more either, as a new working paper by Herndon, Ash and Pollin makes clear. After receiving the original Reinhart and Rogoff data set (collegially provided by the original authors), they found a number of errors that, when corrected, essentially overturn the finding that debt ratios of over 90 percent are associated with slower growth. Mike Konczal reviews the paper in some detail here.
All along, the Reinhart and Rogoff response to critics of their work was pretty much “just look at the data.” From a recent Washington Post article:
Reinhart dismisses these criticisms as wishful thinking. “We’re quite aware that you have causality going in both directions,” she says. “But please point out to me what episodes from 1800 to the present have we had advanced economies who carried high levels of debt growing as rapidly or more rapidly than the norm.” Belgium after World War I, she says, fits the bill, but that’s basically it.
As it turns out, Belgium really matters, in part because it was unintentionally excluded from the Reinhart and Rogoff data—along with some other high-debt/high-growth countries (which are even more important to driving the results).
In a world where evidence mattered, this would be a huge deal for fiscal policy debates. It is hard to overstate just how influential the Reinhart and Rogoff 90 percent threshold was in these debates. As we note in a soon-to-be released paper (which was previewed here and here) pretty much the entire rationale for aggressive 10-year deficit reduction targets (like those often cited by the president) hinges on thinking that the U.S. debt ratio must be stabilized below 90 percent. Let’s see if those targets are changed in response to new evidence. And no, I won’t be holding my breath.