Economists’ Research Sinks Europe

By Shlomo  Maital   


   What if you were a distinguished Harvard Economics professor, formerly IMF Chief Economist, who studied the link between public debt and economic growth?  What if you found that debt above 90 % of GDP kills all economic growth? What if EU nations acted on your research, and relentlessly imposed austerity on their economies, to slash spending, reduce debt and spur growth?

     What if your research was simply wrong?   

     Whooops!  Sorry.  Oh well.

     Kenneth Rogoff is a highly respected macroeconomist who together with colleague Carmen Reinhart, found that for 1946-2009, in the 20 advanced economies, high public debt destroys growth: *

                                                      Public Debt / GDP

                                          > 30%      30-60%          60-90%     90% +    

Average GDP growth:         4.1%            2.8%            2.8%         -0.1%

   Rogoff is no armchair theorist.  He is one of the world’s most experienced applied macroeconomists.  I respect him highly. 

   That is why it is so painful to learn that his research has “coding errors, selective exclusion of available data and unconventional weighting of summary statistics [that led to] serious errors.”  This is according to a study by UMass (Amherst) economists Thomas Herndon, Michael Ash and Robert Pollin, who tried to replicate the Rogoff study.**    Here is what the corrected table should be:

                                                      Public Debt / GDP

                                        > 30%      30-60%           60-90%           90% +    

Average GDP growth:         4.2%        2.9%                 3.2%          2.2 %

    Now, doesn’t this table STILL show that debt hurts GDP growth?  Not really.  Because in the 90% + group are countries that are chronically mismanaged by their leaders.  It is not the debt that costs that one per cent of GDP growth, but the way the money raised by the debt is wasted. 

    EU nations apparently used the Rogoff table to justify their austerity (spending cuts), especially the UK.   Republican Senator Paul Ryan used the Rogoff data to justify his radical austerity budget proposal.  Whoops.  Sorry.  Error.

    What if we replaced historical economic research (which reflects an era utterly different from the current one) with common sense?  What if we said, countries, like businesses, can borrow money, provided they invest it wisely to grow their human and physical capital and build future assets?   Especially during times of high unemployment, when demand is weak? 

     Austerity has failed.  Economists are partly responsible for this, when instead they should have offered plain common sense.  When Rogoff gets it wrong,  all the economic idols have feet of clay.   Political leaders: You listen to economists, even wise ones, at your peril.   British PM Cameron may pay the price in the next election.


*  Reinhart, C.M., and Rogoff, K.S.  “Growth in a time of debt”. Working paper 15639, NBER,  2010.

** T. Herndon, M. Ash, R. Pollin. “Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff”.   PERI, U. Mass (Amherst), working paper no. 322, April 2013.