In 2010, two Harvard economists published an academic paper that spoke to the world’s biggest policy question: should we cut public spending to control the deficit or use the state to rekindle economic growth? Growth in a Time of Debt by Carmen Reinhart and Kenneth Rogoff has served as an important intellectual bulwark in support of austerity policies in the US and Europe. It has been cited by politicians ranging from Paul Ryan, the US congressman, to George Osborne, the UK chancellor. But we have shown that several critical findings advanced in this paper are wrong. So do we need to rethink austerity economics more broadly?
Their research is best known for its result that, across a broad range of countries and periods, economic growth declines dramatically when a country’s level of public debt exceeds 90 per cent of gross domestic product. In their work with a sample of 20 advanced economies in the postwar period, they report that average annual GDP growth ranges between about 3 per cent and 4 per cent when the ratio of public debt to GDP is below 90 per cent. But it collapses to -0.1 per cent when the ratio rises above a 90 per cent threshold.
In a new working paper, co-authored with Thomas Herndon, we found that these results were based on data errors and unsupportable statistical techniques. For example, because of miscalculation and unconventional methods of averaging data, a one-year experience in New Zealand in 1951, during which economic growth was -7.6 per cent and the public debt level was high, ends up exerting a big influence on their overall findings.
