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High Debt Leads to Slow Economic Growth

High Debt Leads to Slow Economic Growth


Carmen Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University) researched and tabulated the national debt and economic growth in 20 advanced economies.  The authors used 2,000+ data points from over 200 years finding that “high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes.”  Source:  American Economic Review, 2010.  Relevantly, U.S. federal debt surpassed 90% of GDP in 2010 and currently 107% of GDP (


Thomas Herndon, Michael Ash, and Robert Pollin [HAP] of the Political Economy Research Institute at the University of Massachusetts, Amherst, wrote a similar paper on debt levels and GDP.  HAP asserts that the Reinhart and Rogoff [RR] paper suffers from “coding errors, selective exclusion of available data, and unconventional weighting of summary statistics,” which “lead to serious errors that inaccurately represent the relationship between public debt and GDP growth….”


RR admits at least one coding error led to “a significant mistake in one of our figures….” yet this mistake appears throughout the paper.  Beyond this, the other issues raised by HAP boil down to subjective interpretations of how data should be averaged and the use of data that was not verified until after RR’s paper was published.


Most importantly, even if one uncritically accepts all of HAP’s methods, their primary results are basically similar to RR’s: countries with debt/GDP ratios higher than 90% have notably lower economic growth.  In fact, HAP found that advanced countries with national debts over 90% of GDP had 31% less economic growth than when their debts were 60-90% of GDP, 29% less growth than when their debts were 30-60% of GDP, and 48% less growth than when their debts were 0-30% of GDP.


The media misrepresented the findings of HAP, in part, because of its confusing interpretation.  HAP claims, “Average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”  At first glance, the ratios would not seem to be “dramatically different” when you read, “The actual growth gap between the highest and next highest debt/GDP categories is 1.0 percentage point (i.e., 3.2% less 2.2%).”


Taken in its proper context, one percentage point (1%) amounts to 31% less economic growth per year.  If real economic growth in the U.S. were reduced by 1% per year over the past 20 years, GDP would have been $13.1 trillion in 2012 instead of the $15.7 trillion that it was.  The lower GDP has far-reaching negative consequences, such as more poverty and reduced life expectancy.  The textbook Microeconomics for Today explains, "GDP per capita provides a general index of a country’s standard of living.  Countries with low GDP per capita and slow growth in GDP per capita are less able to satisfy basic needs for food, shelter, clothing, education, and health."


HAP argues that slow economic growth causes high debt and not vice-versa, while RR implies that high debt causes slow growth.  In 2012, a paper in the Journal of Economic Perspectives by RR and Reinhart’s husband, Vincent R. Reinhart, the chief U.S. economist at Morgan Stanley, addressed cause and effect.  RRR took a straightforward approach by limiting their analysis to “prolonged periods of exceptionally high public debt, defined as episodes where public debt to GDP exceeded 90 percent for at least five years.”  They found that these countries averaged 1.2 percentage points or 34% less economic growth than when debt was below 90% of GDP.  Note that this figure is very close to the 31% difference found by HAP.  RRR concluded, "There is a clear association between high debt and slow growth, and substantial evidence that debt can cause slow growth."


RR readily admits there is variation across some countries, where in some cases, there appears to be no growth deterioration at very high debt levels.  Similarly, HAPs paper shows values that range from -1.8% to 4.6%.


Regardless of which mathematical techniques are used, once the coding errors are corrected and all available data are included, the results are the same: high debt and slow economic growth go hand in hand.  This correlation is based upon extensive observations and disparate mathematical methods.  Existing results show that growth in countries with debt over 90% of GDP is about 30% lower than when debt is below this level.  There is also considerable evidence that high debt can cause slow growth, as well as vice versa.


As of July 2, 2013, the U.S. Gross Debt to GDP Ratio is 107% and rising.  This rising ratio comes despite the sequester cuts of 2.38% and higher taxes (+6.17%).  Government spending continues to pile on the debt with no serious talks scheduled.  If the HAP and RR papers are right, and it has strong evidence, then the continual spending in excess of revenues will likely lead to a prolonged period of slow growth.  Along with slower growth comes the inevitable lower standard of living.  The facts are bearing out -- taxes will not stop the non-stop spending of government.