One of the most oft-cited pieces of evidence used by those lawmakers and public figures enamored with austerity is that too much debt will eventually squash a country’s growth. The academic basis for that claim is a study done by economists Kenneth Rogoff and Carmen Reinhart that claims economic growth starts to slow when a country’s public debt-to-GDP ratio hits 90 percent.
The study has gained so much traction that it was cited in the 2013 House Republican budget to justify the GOP’s desire for crippling spending cuts. "Even if high debt did not cause a crisis, the nation would be in for a long and grinding period of economic decline. A well known study completed by economists Ken Rogoff and Carmen Reinhart confirms this common sense conclusion," the budget document says.
Other economists have certainly taken issue with Reinhart and Rogoff’s findings before, with the popular rebuttal being weak economic growth begets growing debt, not vice-versa. But it seems that the Reinhart-Rogoff study has even bigger problems than that.
As the Roosevelt Institute’s Mike Konczal details, a new paper – "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts—Amherst – shows that there are serious problems with Reinhart and Rogoff’s approach, including that their Excel spreadsheet has an error that fundamentally changes their findings.
As Konczal writes:
If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.
So what do Herndon-Ash-Pollin conclude? They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]." Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.
As economist Dean Baker, a frequent critic of Reinhart and Rogoff notes, "This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment."
Those pushing for austerity to this point have certainly been immune to empirical evidence showing that it doesn’t work. (See, for instance, the fact that austerity crippled growth in Europe, and actually led to increasing debt.) But now the substantive, academic basis for their push has been removed as well. It would be nice if that led to an actual change in policy.
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