Reinhart-Rogoff were wrong in postulating a cliff-effect at 90% debt levels but no one denies excessive debt lowers growth
There has been a tiny earthquake in economics over the last fortnight. Reputations have been dented. Conclusions have been challenged and certainties have collapsed.
Or so it would seem. Reinhart and Rogoff, authors of the justly famous book This Time is Different, published an article in the American Economic Review 2010 ‘Growth in a Time of Debt’. They claimed to have summarised a lot of data for many economies, developed and emerging, on public debt-GDP ratio and GDP growth rates.
They summarised their results in a simple table where debts were classified into four ‘buckets’—below 30%, 30-60%, 60-90%, and above 90%. The average growth rates for the four categories were 5.2, 4.9, 2.5, and -0.2. For developed economies, the pattern was similar but with the final number being -0.1% for debt above 90%; for emerging economies the final figure was a robust 1.3% though still on a declining trend. Reinhart and Rogoff also gave the median growth rates which showed a much more gentle decline as debt grew; 1.6% for developed economies and 2.9% for emerging economies as debt went above 90%.
Most remarkably for a research paper based on a large data set, Reinhart and Rogoff carried out no regression analysis nor did they even compute standard deviations for the average growth rates they had calculated. After 30 years of toiling with data sets, I ceased doing econometric work 20 years ago. But I would have been chastised by my peers for dealing with averages without standard deviations. But there it is and the paper became a classic. The numbers, especially about the negative growth rate for debt-income ratio above 90%, went viral. In the febrile atmosphere of US Presidential election, the Conservatives lapped it up. Paul Ryan, a Presidential candidate for the Republicans, cited the Reinhart and Rogoff result. It became a gospel.
When natural scientists get a result after an experiment, other scientists try to replicate the experiment and check if the result is the same. Only after it has been checked by many other scientists does it get publication.
Even economists, during the controversy about Keynesianism versus monetarism, were always trying out each other’s data sets to check the results. Here nothing seems to have happened for three years. Now a team of three researchers at the University of Massachusetts Amherst (known for