Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff

This is a replication of Reinhart and Rogoff’s “Growth in a Time of Debt” (both the 2010 working paper and the published version), carried out using RR’s own working spreadsheet, which they supplied on 4 April 2013 after the authors found they “were unable to replicate the RR results from the data they posted on their web site.” The target is RR’s summary claim that “whereas the link between growth and debt seems relatively weak at ’normal’ debt levels, median growth rates for countries with public debt over roughly 90 percent of GDP are about one percent lower than otherwise; average (mean) growth rates are several percent lower” – a claim whose published mean figures for 20 advanced economies over 1946-2009 run 4.1%, 2.8%, 2.8% and -0.1% across the debt/GDP bins of 30% or below, 30-60%, 60-90% and above 90%. The paper identifies three distinct problems. First, RR excluded available data for Australia 1946-50, Canada 1946-50 and New Zealand 1946-49 without saying so or explaining why – for Australia and Canada these were the only years those countries ever appeared above 90%, and New Zealand’s four excluded years grew at +7.7%, +11.9%, -9.9% and +10.8%, leaving only 1951 at -7.6% to represent the country. Second, a spreadsheet formula averaged over the wrong range of rows and silently dropped five countries (Australia, Austria, Belgium, Canada and Denmark) from every calculation in both the 1946-2009 and 1790-2009 samples. Third, RR computed “overall averages as means of country means,” so that the UK’s 19 years above 90% and New Zealand’s single year carry identical weight. Together these shrink the above-90% sample from a correct 110 country-years in 10 countries to 71 in 7. Correcting all three and weighting by country-years gives average real growth above 90% of +2.2%, not -0.1%; the lower three bins barely move, so “RR overstate the growth gap between the highest and next highest public debt/GDP categories by a factor of nearly two-and-a-half.” The pattern repeats in RR’s other headline results, though less dramatically: for 1790-2009 the corrected means are 3.7%, 3.2%, 2.5% and 2.1%, so the drop entering the top bin is 0.4 points against a 0.7-point drop one bin earlier; for 1946-2009 medians, the corrected figure above 90% is 2.3% rather than 1.6%, and RR’s own Errata recalculation – keeping their country weighting but fixing the data – yields 2.5%, a drop-off of just 0.4 points. The paper then attacks the non-linearity claim directly: splitting the top bin into 90-120% and above 120% produces 2.4% and 1.6% rather than a cliff; a locally fitted regression across all country-years shows “no particular boundary or non-linearity… around the 90% figure,” and in fact “between public debt/GDP ratios of 38-117%, we cannot reject a null hypothesis that average real GDP growth is 3%.” The one clear non-linearity sits at the bottom of the range, where average growth falls by nearly two percentage points as debt rises from 0% to 30% of GDP – “a range that is not relevant to current policy debate.” Two scope conditions are load-bearing. The exercise is “a narrowly gauged critical replication” that does not survey the wider literature. And on causality, “we follow RR in assuming that the direction of causation… is that high public debt levels produce declines in average GDP growth rates” – the paper contests the arithmetic, not the direction of the arrow.

Thomas Herndon | Macro Paper Warehouse

Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff