One of the most fearsome statistics in the war against the federal deficit has always been the country's ratio of debt to gross domestic product. When this ratio reaches 90%, the argument goes, watch out -- lower economic growth is on the horizon. And that's scary, because that's where the U.S. has been heading.
This idea comes from Harvard economists Ken Rogoff and Carmen Reinhart, who featured it in a 2010 paper and popularized it in a book entitled "This Time is Different: Eight Centuries of Financial Folly."
Since then, the stat has been cited countless times, including by Rep. Paul D. Ryan in rationalizing the draconian spending cuts in his proposed budgets. Now it turns out the authors may have counted wrong.
A new study by three researchers at the University of Massachusetts finds that Rogoff and Reinhart made several mistakes that invalidate their thesis.
In their analysis of growth rates of 20 industrialized countries, including the U.S., from the postwar period through 2009, Rogoff and Reinhart excluded data for three countries that had both high debt-to-GDP and high economic growth, which contradicted their finding. They tweaked other figures in a way that minimized overall growth rates for some high debt/GDP countries.
Most important, they made a spreadsheet error that resulted in their leaving five countries out of an all-important average of countries with higher than 90% debt-to-GDP ratios. By restoring the full average, the UMass authors say, the growth rate for countries in that range becomes 2.2%, not the -0.1% cited by Rogoff and Reinhart. That makes the average growth rate at that ratio "not dramatically different than when debt/GDP ratios are lower."