Does too much debt cause slower growth and inflation? Carmen Reinhart and Kenneth Rogoff attempted to answer this question in their “Growth in a Time of Debt” paper published on January 2010. After analyzing data on 44 countries dating back 200 years, they found that the higher a country's debt-to-gross domestic product (GDP) ratio is above 90 percent, the lower GDP growth is and the risks of inflation and default increase.
A new study by three University of Massachusetts researchers pointed out that the Reinhart and Rogoff paper cherry picked data, excluding data from three countries that had both high debt and high GDP growth. The countries contradicted their thesis for public debt’s negative impact on growth. In addition, the researchers uncovered an error, as Reinhart and Rogoff left five countries out of their average of countries with debt-to-GDP ratios higher than 90 percent.
Rogoff and Reinhart have responded and it appears to all that the reason for the mistake with the data was an Excel spreadsheet error. However, the bigger story was the reaction in the media. Liberal pundits attacked the work of the two economists and blamed the austerity movement on them.
Economist and New York Times columnist Paul Krugman started off his first piece (he has authored five of them on the subject in the past two days) attacking the economists with the following excited statement: “The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policymakers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear.”
Thousands of other liberal pundits have blamed the economists for the “austerity movement.” However, economics and politics aside, this statement could not be further from the truth. While Reinhart and Rogoff were cited by many prestigious publications and politicians, their arguments go back to the 1800s.
The austerity-versus-government-stimulus debate is based on economic theories developed in the 1800s. Furthermore, during the Great Depression (before the authors were even born) a similar argument took place on the New Deal. The fight over the economic vision regarding America is not new, beginning long before the economic debate and President Obama’s spending frenzy. Both sides still have plenty of data to back up their arguments.
Furthermore, the right wing is not anti-spending, while the Democrats are pro-spending. The Democrats attacked President George W. Bush for deficits that were far smaller than Obama’s are (both in dollar terms and as a percentage of GDP). Without getting too political, it is vital to point out that pundits like Krugman are merely hypocrites in this spending-versus-government-cuts fight.
If I am pointing something out that is so obvious, why is the media caught up on one study, and why has everyone else missed my point? I think there are two reasons: 1) the media likes to focus on exciting new developments and this is big news as opposed to a 150-year-old debate, and 2) pundits in the media are focusing all their energies on one study to distract attention from the other non-discredited facts. By doing so, they attempt to give Obama a free hand to spend on whatever programs he wishes.
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