Since 2010, conservatives have used a 2010 paper in the American Economic Review by Carmen Reinhart and Kenneth Rogoff to claim spending cuts should be made to preserve the economic and fiscal futures of America. The argument claims that debt levels greater than 90 percent of gross domestic product — 15 percent lower than America’s current debt-to-GDP ratio — harm economic growth. This position has been prominently touted by, among others, former Republican vice presidential candidate Rep. Paul D. Ryan, R-Wis.
In recent weeks, this argument has been challenged by three researchers at University of Massachusetts, Amherst, for alleged errors in the original Reinhart-Rogoff paper. According to Thomas Herndon, Michael Ash and Robert Pollin, the Reinhart-Rogoff conclusions are wrong. Their prominent political supporters include Rep. Chris Van Hollen, D-Md., and former Sen. (and Virginia gubernatorial candidate) Tim Kaine, who have used these critiques to call for an end to alleged “austerity.”
This has sparked a ferocious national discussion over the relationship between the national debt and economic growth. Recently, as part of that discussion, Just Facts President James Agresti dug into both studies. What he found was devastating to the arguments put forth by Herndon, Ash and Pollen.
As Agresti documented at JustFactsDaily.com, Herndon, Ash and Pollen chose, in fact, to ignore their own conclusions. “The primary results are basically similar to Reinhart-Rogoff’s: countries with debt/GDP ratios higher than 90 percent have notably lower economic growth.”
What are those results? Agresti notes that Herndon, Ash and Pollen “found that advanced countries with national debts over 90 percent of GDP had 31 percent less economic growth than when their debts were 60-90 percent of GDP.” This sounds oddly familiar. In fact, Reinhart-Rogoff’s paper expects a 1.2 percent drop in economic output per year at 90 percent of GDP, while Herndon, Ash and Pollen say the percentage is about 1 percent at 90 percent of GDP. These are quite similar findings overall. Moreover, Agresti calculated that America’s 2012 GDP would have been about $2.6 trillion less ($8,333 per American) had 1 percent less GDP been garnered annually for 20 years.
According to Herndon, Ash and Pollen and their supporters, Reinhart-Rogoff’s work has been the intellectual basis of the “austerity” movement across the nation. Yet, as Agresti states, “such claims are belied by actual data on government spending from the U.S. Bureau of Economic Analysis (BEA).” Between the start and end of the Great Recession, total government spending increased by 17 percent, and from 2007 to 2012 government spending increased by 9 percent, as compared to the U.S. economy.
The critics still persist, however — even though Reinhart and Rogoff are not the only reputable economists claiming high debt is harmful. The Congressional Budget Office reported in February 2013 that $4 trillion in deficit reduction measures over 10 years would improve economic growth in the same time period, put out a 28-slide presentation outlining the dark fiscal future facing America under “current law,” the more optimistic of the two projections the CBO generally makes about future policies. Here is one finding: By 2023, tax revenue will be higher than the 40-year average, but so will spending. Most of this spending is because of growth in Social Security and Medicare.