Reinhart, Rogoff: Our Findings Hold Despite Challenge

Friday, 26 Apr 2013 11:58 AM

By Dan Weil

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Harvard economists Carmen Reinhart and Ken Rogoff stand by their 2010 study showing that government debt totaling 90 percent or more of gross domestic product (GDP) puts a big damper on economic growth.

A trio of University of Massachusetts economists recently found an error in the duo’s economic data.

In a New York Times opinion piece, Reinhart and Rogoff acknowledge that mistake, but maintain that the study’s conclusion still hold. “Over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of GDP,” they say.

Editor's Note: The Final Turning Predicted for America. See Proof.

“The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon,” Reinhart and Rogoff write.

To be sure, the numbers aren’t a hard and fast rule, they note, adding that they do not “assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested.”

But some on the left have it wrong too, the economists say. “The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.”

The brouhaha has spurred debate over how much government austerity is appropriate in the United States and Europe.

“We agree that growth is an elusive goal at times of high debt. We know that cutting spending and raising taxes is tough in a slow-growth economy with persistent unemployment. Austerity seldom works without structural reforms and if poorly designed, can disproportionately hit the poor and middle class,” they write. “Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists.”

“Most advanced countries, including the United States, seem caught in a similar trap,” writes Washington Post columnist Robert Samuelson.

“Their debt-to-GDP ratios are high and rising, so it’s hard to embrace massive deficit-financed stimulus programs. But austerity programs of spending cuts and tax increases may dampen growth and raise debt-to-GDP ratios.”

Editor's Note:
The Final Turning Predicted for America. See Proof.

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