Wednesday, April 24, 2013
Last week, careful research by UMass-Amherst professors found that the seminal paper by Ken Rogoff and Carmen Reinhart contained a data error that biased their conclusion that debt-to-GDP ratios in excess of 90% lead to dramatically slower economic growth. The 90% of GDP figure was arbitrary with no theoretical basis. As a result, it’s not terribly surprising to find that its significance was oversold. Yet, the basic contention that high levels of public debt weigh on growth was and remains perfectly reasonable. It is unfortunate that Reinhart and Rogoff’s mistake has been used by proponents of government activism to invalidate the basic premise that increases in public indebtedness slow growth.