A lot of economic research sits on shelves collecting dust or, more recently, is read online by others doing economic research. In recent days, some research has been reported by various business news services and social media. Ken Rogoff and Carmen Reinhart have received much acclaim in recent years for research about financial crises (for example, see This Time is Different). Before most people could imagine a financial crisis taking place in the United States, they provided research indicating that it was a distinct possibility (click here). A follow up piece of research examined the impact of national debt on economic growth, with one of the main conclusions being that nations with a national debt of more than 90% of GDP tend to grow more slowly ("Growth in the Time of Debt"). Here's a relevant quote from the abstract of the paper:
"Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more."
Rogoff and Reinhart provided their data to other economists who claimed to have found some errors in the data set which have some impact on the conclusions (see Herndon, Hash, and Pollin). Rogoff and Reinhart responded by acknowledging one of the mistakes while defending other parts of their research. The mistake involved a simple excel error that left out certain countries. How does the new research affect the conclusions? As far as I can tell, there is not a significant change in the median growth rate, but the average growth rate for high-debt countries following WW2 goes from -0.1% to 2.2%. The critics point out that this suggests that countries shouldn't worry as much about high debt while Rogoff and Reinhart point out that this still implies slower growth for high-debt countries (3.1-3.2% for those between 30-90% debt levels and 2.2% for those above 90%) and also is now more in line with other research they have published since then covering a longer time period. A reduction in growth of 1% per year adds up over time (think about the US experiencing a weak recovery with an average growth rate of 2% instead of a stronger recovery with growth of 3%). There are a lot of other issues involved, but this is a blog post, not a research paper. Why is it getting so much public attention?
Most of the attention is coming from critics of austerity and those on the left side of political spectrum. They view the updated results as suggesting that countries shouldn't have to worry as much about high national debt. Some also claim that the initial results provided the support for austerity programs being implemented around the world. Are they correct?
First, Rogoff and Reinhart were careful to indicate that they thought they found a correlation, not a causation. In other words, they didn't explicitly state that their results indicated that high debt levels led to slower growth, though that was implied. Critics point out that weakening economic conditions result in higher debt, so it's possible that the weak growth led to high debt rather than the other way around. Rogoff and Reinhart acknowledge this possibility, but point out that they looked at countries with weak growth and high debt for extended periods of time, not simple recessions.
Second, does it make sense for 90% to be a threshold? I don't see any economic reasoning for a threshold number. Some countries can have higher debt loads before suffering consequences while others may face debt crises at lower debt loads (implied by Rogoff and Reinhart as they drew different thresholds for developing economies as opposed to developed economies). Other factors play a role such as the domestic savings rate, monetary policy, perceived credibility of the government's fiscal policy, etc.
Did this research provide the basis for austerity? I think that's a very hard claim to justify. Austerity programs in Europe resulted from various governments being unable to finance their debt. For example, Greece is being forced to implement austerity as a condition of the European bailout. In addition, since investors won't purchase Greek bonds at reasonable interest rates, there's pressure on the government to reduce their need for financing (i.e., austerity). Is this the best approach? That's debatable; but the motivation was not academic research, but real world pressure.
Did political conservatives try to use the research to support their perspective? Of course. That's one of the points of this blog; it's important to separate economics from politics. Too many people with political agendas choose to use research that supports their bias. Similarly, it would be improper for liberals to say there's no need to ever worry about debt loads (I'm not saying that's being said).
Does the national debt matter? The recent experiences in Europe as well as other historical experiences clearly indicate that it does. Nations with high debt loads that have difficulty financing their debt will experience higher interest rates that hurt economic growth, result in higher interest on the debt which crowds out other programs, etc. Policies that seek to reduce the budget deficit in the short run (austerity) hurt economic growth and must be implemented with care. Ideally, governments should put policies in places that avoid debt crises such as running budget surpluses during good economic times so there's more room for budget deficits during bad economic times. As those in Europe can attest, pressure to implement austerity when the economy is weak should be avoided if at all possible.
Did Rogoff and Reinhart deliberately make mistakes? That's hard to believe. They have been serious economists for years and had already received praise for their work on financial crises. In the past, they had been criticized by political conservatives for showing that recoveries from financial crises tend to be slow (and thus President Obama can't be fully blamed for the slow recovery). Now they are being criticized by those on the left for research about problems resulting from high debt levels. They made an embarrassing mistake, but seem to be researching economics without an agenda.
