Paper Comments: "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff" (Herndon, Ash & Pollin)
ABSTRACT: "Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.
The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff 's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth"(See more)
COMMENTS: While there's an obvious econometrical battle that this paper arises, the fact is the authors show than the hypothesis of Reinhart and Rogoff was wrong, that is, a very high public debt reduces GDP's growth. The main discussion is whether US high debt is not sustainable only for public finances or not, but if that ratio affects negatively GDP's growth, thus US recovery. Of course, the political aspect is to sustain the argument that more expenditure (then more deficit) will help growth or not, instead of putting limits to it or being counterproductive for the recovery. The answer is still out there.