The argument in recent years that sovereign debt of at least 90% of GDP
(gross domestic product) was incompatible with economic growth was underpinned
by the work of two top US economists: Kenneth Rogoff of Harvard University and a
former IMF chief economist, and Carmen Reinhart, an economics professor at the
University of Maryland, until recent times. The economists who were authors of
the celebrated 2009 book, 'This
Time It’s Different: Eight centuries of financial folly; conceit and money'
and a 2010, paper, 'Growth
in a time of Debt', have been accused of using dodgy calculations.
University of Massachusetts Amherst economics doctoral student Thomas Herndon
and professors Michael Ash and Robert Pollin,
said Reinhart and Rogoff were wrong in concluding in their 2010 study that a
high level of public debt dooms an economy to protracted slow growth.
The Reinhart-Rogoff paper found that countries with ratios of public debt to
gross domestic product above 90% tend to see their economies not grow but rather
contract about 0.1% annually. The US's current debt-to-GDP ratio is estimated at
slightly over 100%.
The researchers at the University of Massachusetts Amherst, said that when
they repeated the analysis with the same data they got a figure of plus 2.2%.
“Coding errors, selective exclusion of available data, and unconventional
weighting of summary statistics led to serious errors that inaccurately
represent the relationship between public debt and GDP growth,” they said.
statement (published by The New York Times), Professors Reinhart and Rogoff
did not directly address the assertions of mathematical errors, and noted that
they had only just started to sift through the new paper. But they argued that
the Amherst authors had also found lower growth rates when a country had debts
equivalent to or greater than 90% of annual economic output. “It is hard
to see how one can interpret these tables and individual country results as
showing that public debt overhang over 90% clearly benign,” they
The Times says that the seemingly esoteric debate within the economics profession has collided this
week with a broader challenge to excessive budget-cutting in countries around
the world. The IMF cautioned Washington against cutting its budget too fast,
too soon, even as it saw the American economy strengthening. And on Tuesday,
Olivier Blanchard, the fund’s chief economist, warned that Britain was “playing
with fire” with its austerity policy.
On Tuesday on
the Irish Economy blog, there was a similar argument about dodgy statistics
used by the ECB in a survey which compared household wealth in different
countries of the Eurozone.
Paul De Grauwe, a professor of economics at
the London School of Economics, and a colleague had criticised the ECB survey
and used alternative data in a commentary. However,
Michael Hennigan of Finfacts pointed out that the data used by De Grauwe was
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