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Correcting the 90% Debt Effect on GDP Number April 29, 2013

Posted by geoff in News.

I’m sure you all remember the paper by a pair of Harvard University professors saying that a public debt level of 90% of GDP would significantly suppress GDP growth. Well, a team from UMass/Amherst has pointed out that Reinhart and Rogoff made mistakes in their analysis, excluding data from several countries. This has caused quite a stir, with the Keynesians on the warpath, trying to turn this into a green light for more spending.

But let’s take a look at the corrected data before the Keynesians get their tentacles too deeply into our pockets. Here’s a corrected summary of the data provided by the UMass team:


So if you stare at that for a while, you come to a couple of conclusions. One, of course, is that the data scatter is enormous, suggesting that other influences are playing a more important role on economic growth than public debt. But the second is that yes, increased debt does correlate with lower growth, and while the dependency levels off between 50% and 70% debt, it does decrease significantly thereafter.

The UMass folk conclude their report with this statement:

RR’s incorrect stylized fact has contributed substantially to ensuring that traditional debt management issues should be at the forefront of public policy concerns” (RR 2010a p. 578). Specifically, RR’s findings have served as an intellectual bulwark in support of austerity politics. The fact that RR’s fi ndings are wrong should therefore lead us to reassess the austerity agenda itself in both Europe and the United States.

But that’s not at all true, based on their own figure. What is true is that there is no sharp dropoff at a given debt level – but there’s a smooth and very significant degradation with debt levels above 70%.

Does this really warrant revisiting austerity policy?

As an aside, I don’t approve of these sniping attacks when it’s clear that an inadvertent mistake has been made. I believe collegiality requires that you notify the author of the error so they can issue a correction with a minimum of embarrassment. Blindsiding colleagues in public over math errors is petty and malicious. When it’s a difference of interpretation or conclusions, however, the gloves are off and battle should be engaged.

In this case, the unprofessional nature of the UMass team’s attack, the readily apparent bias they have against austerity policies, and the exaggerated conclusions they draw combine to make me suspicious of their results. I’m going to wait for Reinhard & Rogoff to issue their own correction before I truly believe the data interpretation.

You can read Reinhard & Rogoff’s response to the UMass critique here.


1. geoff - April 29, 2013

That’s got to be the suckiest title I’ve ever written, but I’m in a hurry and needed something terse.

You may suggest alternatives, but you’ll have to try extra hard if you want to hurt my feelings.

2. geoff - April 29, 2013

A tweet from Ezra Klein:

“the paper that took apart the Reinhart/Rogoff thesis was the perfect story at the perfect time.” http://t.co/PPpTHaKK4p

Klein never looks too carefully at studies that he likes. And neither, apparently, does Kevin Drum.

3. xbradtc - April 30, 2013

“UMASS Team correct, and yet still full of shit.”

Feel free to borrow that.

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