Fear of debt is woven deeply into our culture. We associate debt with profligate spending, waste, gambling and overall sinfulness. As we learned during the housing bubble, it’s easy to get in over our heads. So naturally we assume that the same must be true for our country — government debt must be bad.
But is it?
For the past several years, this powerful cultural imperative received factual confirmation by two of the most renowned economists in the field, Harvard’s Carmen Reinhart and Kenneth Rogoff. They provided what seemed like rock solid evidence that increasing the national debt undermines economic growth. More importantly, they came up with a critical “fact” that everyone could understand: when a country’s debt surpasses 90 percent of it’s economic output (gross domestic product — GDP) bad things happen — the economy shrinks instead of grows. Below 90 percent all is well.
These experts assured us that their findings were supported by the facts on how 20 major countries fared between WWII and 2009. They claimed to have uncovered a sharp dividing line — countries with debt rates that ranged from 60% to 90% grew by 3.4%. Those with debt burdens above 90% saw their economies decline by an average of -0.1%. That’s a stark difference….if true.
Because U.S. debt today amounts to about 100.8% of GDP, the 90% cutoff line serves as a powerful political tool. It’s easy to understand and even easier to deploy as a weapon in the never ending battles over government spending and taxes. For example, Congressman Paul Ryan wields the 90 percent dividing line like an ax to justify slashing Social Security, Medicare and Medicaid. It also shows up in Congressional testimony and in hundreds of scholarly articles. European policy makers use it to justify severe austerity programs forced onto countries like Greece, even as those programs cause hunger among children. After all, it seems obviously true that if you go over that 90 percent line, you’re in serious economic trouble, and therefore you need to cut, cut, cut now to save your country from ruin.
But is the 90 percent line real?
No. Thomas Herndon, an economics graduate student at the University of Massachusetts Amherst tried to replicate the Reinhart/Rogoff findings in a term paper for his econometrics class. After receiving the data spreadsheet from the two eminent Harvard professors, he found enormous errors. As Reuters reports:
“I almost didn’t believe my eyes when I saw just the basic spreadsheet error,” said Herndon, 28. “I was like, am I just looking at this wrong? There has to be some other explanation. So I asked my girlfriend, ‘Am I seeing this wrong?’” (more…)