Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff

[Bill USA]

http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/




Thomas Herndon | Michael Ash | Robert Pollin | 4/15/2013


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Abstract:
[font size="3"]Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. [/font]They find that when properly calculated, 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 published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. [font size="3"]Overall, the evidence we review contradicts Reinhart and Rogoff 's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth[/font].

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1 The current version of this paper was updated at 1:35 pm on April 17, with the following corrections:

(1) The notes to Table 3: "Spreadsheet refers to the spreadsheet error that excluded Australia, Austria, Canada, and Denmark from the analysis." is corrected to read: "Spreadsheet refers to the spreadsheet error that excluded Australia, Austria, Belgium, Canada, and Denmark from the analysis."

(2) Page 13: “Thus, in the highest, above-90-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950-2009 sample declines to only 2.5 percent per year in the 1980-2009 sample” is corrected to read "Thus, in the lowest, 0–30-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950–2009 sample declines to only 2.5 percent per year in the 1980–2009 sample."

[bemildred]

1. It's a ludicrous idea.

What causes growth is investment, not spending. Who does the investment is not important, in fact the government will generally be better at it.