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News from EPI Economic Policy Institute analysis finds claims of a debt threshold for the United States economy are ill-founded

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For Immediate Release: Monday, July 26, 2010
Contact: Phoebe Silag or Donte Donald, news@epi.org 202-775-8810

A commonly referenced finding from a frequently-cited research paper by Carmen Reinhart and Kenneth Rogoff is deeply flawed, a new analysis by the Economic Policy Institute shows.

In Growth In A Time of Debt, Reinhart and Rogoff claim that when government debt exceeds 90 percent of gross domestic product, economic growth is negatively impacted. EPI’s report outlines the problems with the data and data interpretation that cast severe doubt on the claim that there is a well-defined threshold above which public debt cannot rise without affecting growth, let alone a threshold precisely at 90 percent.

In Government Debt and Economic Growth: Overreaching Claims of Debt “Threshold” Suffer From Theoretical and Empirical Flaws, EPI researchers John Irons and Josh Bivens analyze Growth in A Time of Debt. Their primary findings are:

  • The 90 percent level was not determined by the data. Reinhart and Rogoff created four arbitrary debt level categories, which makes the “cliff” effect of the 90 percent even more questionable.
  • The United States has exceeded the 90 percent threshold in only 6 of the 218 years that Reinhart and Rogoff analyze. These 6 years were in the 1940s, when economic trends was dominated by the influence of World War II defense spending—particularly the withdrawal of government spending and the resulting economic contractions of postwar demobilization. In short, general notions about the relationship between high debt levels and growth cannot be inferred from this one unique era.
  • Reinhart and Rogoff find a correlation between high debt levels and slower growth and infer causality—but economic theory suggests that causality would actually be more likely to run in the opposite direction, as slow growth sees revenue declines and rising safety spending that adds to debt. The data supports this alternate explanation.
  • Reinhart and Rogoff look at debt in a given year and growth in that same year— but textbook theory actually argues that borrowing in one year would affect future growth.
  • Reinhart and Rogoff measure gross debt, but it is debt held by the public that is economically relevant. In 2009, the difference between gross debt and debt held by the public was more than $2 trillion, or 16% of GDP—and that difference is critical in the determination of a specific threshold.The U.S. economy is currently experiencing the worst recession in 70 years. The recession is marked by persistent unemployment—more than 14 million workers are unemployed, and almost half of those have been unemployed for longer than six months. Influential policymakers and members of the media have cited the work of Reinhart and Rogoff as evidence of a need for immediate debt reduction. However, the 90 percent threshold established by Growth in a Time of Debt simply is not real. It is true that the U.S. faces long-term structural budget deficits—particularly in relation to rising health care costs. However, the immediate economic crisis that the federal government must address remains a severe lack of jobs. The immediate danger is that debt- and deficit-related concerns will paralyze the Obama administration and Congress and prevent them from taking aggressive action on job creation.
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