Economics and politics of federal debt-growth controversy

May 23 2013 - 1:00pm

Since the great recession of 2007-2008, mainstream conservatives, Tea party and right wing conservatives and their sympathizers in the media have been repeating the austerity mantra, despite abundant facts supporting the logic that cutting spending in a high unemployment and low inflation economy is deleterious to economic growth.


The facts are that the U.S. economy still has a high unemployment rate, low interest rates (thanks to the economically sound policy of the Federal Reserve) and a very low inflation rate. Since investment spending, consumption spending and exports are not growing robustly, the only way to stimulate economy is to increase targeted spending to create jobs. The austerity crowd is so worried about the economic future of their grandchildren that they will not compromise on any budget deal with President Obama that affects the current national well-being. 

Debt hawks are not paying attention to the effect of austerity programs in Europe. The Wall Street Journal, May 16, reported that Euro Zone countries are facing a second recession as deep as the first. The worry that increased spending would lead to inflation, high interest rates and crowding out of private investment in the U.S. is based upon fiction and ideology, not facts or logic.

Therefore, these groups were desperately looking for some other logical argument to bolster their justification for austerity. They found that support, though questionable, in studies of Harvard researchers, Carmen M. Reinhart and Kenneth S. Rogoff (RR). But RR's findings are only instructive, not definitive.  

Other researchers have criticized RR studies on methodological grounds. Let me first briefly discuss RR studies' results before presenting the critique.

RR's main findings are contained in two papers. One published in American Economic Review (AER), May 2010, and the other appeared in the Journal of Economic Perspective (JEP), Summer 2012. They examine the relationship of growth and debt to GDP ratios, because GDP determines a nation's capacity to issue and pay debt. Using very long term data, studies basically found that average inflation adjusted (real) growth rate across advanced countries is lower when public debt to GDP ratio is 90 percent and above (labeled as debt overhang), as opposed to the average real growth rates at ratios below 90 percent. 

However, for the period 1946-2009, RR found average (not median) real growth rate across advanced countries at -0.1 percent when debt to GDP ratio is 90 percent and above, whereas average real growth rates vary between 2.8 to 4.1 percent for ratios lower than 90 percent. Conservative politicians have latched on to the later results to harp on austerity only policy. 

Thomas Herndon, Michael Ash and Robert Pollin (HAP) of the U of Massachusetts, examine RR's results in their study, April 2013, using RR's data from 1946-2009 for advanced countries. They found errors and methodological problems in RR's studies and hence were unable to replicate RR's results. HAP's main finding is that "...when properly calculated, average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as RR claims." 

According to HAP, RR's study suffers from 1) spreadsheet errors that led to the exclusion of five countries out of 20, 2) selective exclusion of data, and 3) unconventional weighting of summary statistics. The first two errors alone led to underestimation of the average real growth rate across countries with debt overhang episodes. An inappropriate weighting method also resulted in biased estimates of average real growth rates in RR's studies. Different countries had very different growth rates with highly varied episodes of debt overhang. For example, the UK had an average real growth rate of 2.4 percent during 19 years of debt overhang within the sample period, while the U.S. had average real growth rate of -2.0 percent, but for only four years of debt overhang. 

Hence, it makes statistical sense to give more weight to UK than to the U.S. in calculating average real growth rate across countries. 

 RR also do not establish that high debt is the cause of lower growth. Lower growth, especially in recessions, leads to less revenues and higher spending and hence higher debt, as happened in the recent recession. Even RR admit in the JEP paper that, " We would not claim that the cause-and-effect problems involved in determining how public debt overhang affects economic growth have been definitively addressed." RR also do not address the issue of the effect of lower debt-induced higher growth on unemployment rates. Does rising tide lift all boats?  

U.S. fiscal policy should be to stimulate certain sectors of the economy to provide jobs, especially when we have very low interest rates, a low inflation rate and no threat of crowding out of private investment. It is the demand that is discouraging private sector investment and it is unemployment that is arresting demand growth. Deliberate efforts to reduce deficit and debt could be undertaken in the expansionary phase of the economy, but not yet.

Mathur is former chairmen and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. His articles appear in He also writes a blog for the Standard-Examiner at,etc.


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