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?'"
Robert Polin, one of Herdon's professors (along with Michael Ash) was incredulous:
"At first, I didn't believe him. I thought, 'OK he's a student, he's got to be wrong. These are eminent economists and he's a graduate student,'" Pollin said. "So we pushed him and pushed him and pushed him, and after about a month of pushing him I said, 'Goddamn it, he's right.'"
Herden, Polin and Ash recently produced a paper that should upend the entire austerity debate. They show in detail how the Reinhart/Rogoff dividing line is based on faulty data and analysis. For example, they found that Reinhard/Rogoff omitted several key countries entirely, left out several critical years for certain countries, mis-coded some data, and used a highly questionable method to average the final results. When the UMass Amherst team corrected the errors and reran the data, the sharp 90 percent dividing line vanished. Instead of finding an average negative growth rate of -0.1% for countries over the 90 percent line, they conclusively found that these economies actually grew by an average of 2.2%. Overall, they found only slight changes in growth based on different levels of debt.
There is no sharp dividing line -- the 90 percent threshold is a fiction.
But wait, isn't rising government debt still a serious problem?
The relationship between debt and economic growth is complex. The fictitious 90 percent line is based on the idea that debt causes economic growth to falter. But causation may run in the other direction. Debt also grows when economies crash for other reasons (like when banksters rob you blind). As unemployment and business failures rise, governmental social expenditures rise as well, while tax revenues fall. So in that case, (which may be most cases) rising debt is caused by an economy in trouble, not the other way around.
Also, it matters even more if austerity policies are put into place when none are needed. As economist Dean Baker asks, "How much unemployment did Reinhart and Rogoff's arithmetic mistake cause?"
Do facts still matter?
The UMass Amherst critique should demolish the 90% meme. But will it? The early returns aren't encouraging. For starters, Reinhard and Rogoff show no signs of contrition, even as their infamous 90% threshold is no longer are supported by their own data. In fact, in their first public response, they seem to admit to only one "regrettable slip" -- more like a typo -- when in fact there were multiple errors of fact and methodology:
"It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," they said in a joint statement. "We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."
That statement should worry us. Either the UMass Amherst study is way off (which it isn't) or Reinhard/Rogoff are stuck in their own anti-debt ideology and damn the facts. It shows how hard it must be to give up on a great new finding that makes you a player at the highest levels.
If such exacting experts are willing to overlook facts, you can well imagine how the rest of the debt hysteria crew will respond. They won't. We can expect them to continue to claim that rising debt is a disaster for us. That's because the real drivers of this debate -- Paul Ryan, Rand Paul, the Tea Party Republicans, billionaire Peter Peterson and much of Wall Street really don't give a damn about facts or even about the debt. Their real goal is the destruction of government programs that serve the collective good. Ayn Rand acolytes like Paul Ryan detest the very idea of government social programs for anyone. They want to eliminate Social Security, Medicare and Medicaid as a matter of principal. In the Randian universe, all forms of collective support provided through government are evil. The destruction of the 90 percent threshold won't dent such strongly held beliefs.
Will President Obama continue to cave into debt hysteria?
One would hope that the new facts might have a positive impact on President Obama's tendency to negotiate against himself. Without that 90% threshold there is absolutely no reason why even conservative Democrats should support any cuts in Social Security or other social programs for middle and low income Americans. Debt no longer should be part of the debate about whether or not we can afford a robust safety net.
Instead, we should be spreading a different kind of common sense. I mean look around. We are a very, very rich country. We have financiers who make over a million dollars an hour. We have wealthy individuals and corporations who have stashed trillions of dollars in off-shore accounts. Of course we can afford social programs for those in need. Of course we can afford to invest in our infrastructure. Of course we can afford to put our people back to work. The real question is whether or not we believe that it is just to use government to promote the common good.
The Ayn Rand Republicans hate the safety net with a vengeance. The Democrats no longer have an excuse.
Les Leopold is the director of the Labor Institute in New York and author of How to Make a Million Dollars an Hour: Why Hedge Funds get away with Siphoning Off America's Wealth (Wiley, 2013)
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