Tuesday, April 30, 2013

The bottom line on the Reinhart-Rogoff controversy

In the end, all the corrections advocated by the critics shift the average GDP growth for very-high-debt nations to 2.2 percent, from a negative 0.1 percent in Reinhart and Rogoff’s original work. The finding remains that economic growth is lower in very-high-debt countries (see chart). It has been disappointing to watch those on the left seize on the embarrassing Excel errors but ignore this bigger picture.

The negative correlation between public debt and economic growth is also present in the other samples studied by Reinhart and Rogoff, and it is a finding whose broad contours are consistent with other empirical analyses. Although the critics are right that it’s difficult to pin down the exact strength of the debt-growth correlation, that’s no reason to discard the balance of evidence suggesting that it is negative.

Equally, it’s time to abandon the more specific claim that there is a threshold of 90 percent of GDP beyond which the negative effects of public debt on economic growth become particularly evident. This was always a stretch, and is now quite clearly inconsistent with the balance of the evidence. Unfortunately, it’s the sort of sound bite that the media and our politicians find irresistible.

Lost in all this sound and fury is the real question that we should be debating: Is it appropriate to infer that high debt is driving slower growth, and hence governments need to take greater care before taking on debt? Or is lower GDP growth, or perhaps some other factor, the reason that debt burdens rise? If the observed correlations reflect the latter reason (and there are hints that it may), then the whole exercise has little relevance to public policy.
--Betsey Stevenson and Justin Wolfers, Bloomberg, on the big picture