High national debt and tepid economies: together like PB&J
In the last few years, a 2009 book and 2010 paper by Carmen Reinhart and Kenneth Rogoff have driven the intellectual discussion over cutting spending and debt in order to grow the American economy. As of late, however, the paper – which concluded that national debt levels over 90% of GDP slow growth dramatically – has come under fire from a doctoral student and two others at UMass-Amherst. Many partisans have since taken advantage of the work of these three men – Thomas Herndon, Michael Ash, and Robert Pollin (HAP) – to make various attacks on Reinhart-Rogoff’s (RR) work and character.
Those partisans (as well as Herndon, Ash, and Pollin) have misled in their attempt to stand against fiscal discipline. As Just Facts President James Agresti noted in his most recent fact-check analysis, their claims were wrong on multiple levels. Here are two of the most important:
First, Herndon, Ash, and Pollin claim there is no association between high national debt and slow economic growth. Yet, as Agresti points out:
The primary results are basically similar to RR’s: countries with debt/GDP ratios higher than 90% have notably lower economic growth.
Specifically, Agresti noted:
HAP found that advanced countries with national debts over 90% of GDP had 31% less economic growth than when their debts were 60-90% of GDP, 29% less growth than when their debts were 30-60% of GDP, and 48% less growth than when their debts were 0-30% of GDP.
In other words, high national debts are associated with slow economic growth, and HAP’s own data shows it.
Second, Herndon claims HAP’s work defies RR’s “definitive threshold” of 90% of GDP being the key number at which a nation’s economy is impacted by national debt. However, this is also false – like any pair of academics, RR simply noted a correlation. From Agresti:
RR explicitly state in their original 2010 paper that “there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels.”
Additionally, in 2011, RR wrote the following:
We aren’t suggesting there is a bright red line at 90 percent; our results don’t imply that 89 percent is a safe debt level, or that 91 percent is necessarily catastrophic. Anyone familiar with doing empirical research understands that vulnerability to crises and anemic growth seldom depends on a single factor such as public debt.
Clearly, the partisanship of RR’s critics is not limited to those in the non-intellectual mainstream and left-leaning media; Herndon is letting his own biases get in the way of the facts.
Related, the partisans who have taken HAP’s research and run with it through the media and intellectual communities have claimed RR’s research was used for “austerity” in America. Yet, as Agresti points out, for the last five years government spending has been at or near all-time highs. In fact, “actual data on government spending from the U.S. Bureau of Economic Analysis (BEA)…[shows] the portion of the U.S. economy consumed by local, state and federal governments increased by 17%” from the beginning of the recession to the end of it in 2009. Further, last year, all government spending in America was “still consuming 9% more of the U.S. economy than in 2007.”
In short, the Reinhart-Rogoff paper and book are sound, both academically and intellectually, and even their most famous critics’ data shows this. Yet the partisanship of Reinhart and Rogoff’s critics seems to be continuing unabated, which is bad for two reasons: First, it’s damaging to a constructive and honest national discussion on spending and debt. Second, that damage is only going to allow our national debt, which is at approximately 105% of GDP, to continue harming the ability of Americans to work, save, and invest in their futures and the futures of their children and grandchildren.