Throught this whole process, R&R—and especially Kenneth Rogoff—keep equivocating about what causal links they’re trying to establish and for what purpose. Attack their strong claims and they retreat to weaker ones. But to establish the political argument that Rogoff has advanced in sworn testimony before the United States Congress requires strong evidence that there’s some reason other than interest rates and debt service costs that high debt burdens lead to slow growth. A broad correlation does not constitute evidence for that proposition. Only a tipping point does. And it’s clear that the evidence for a tipping point is extremely weak and depends on a series of contestable methodological claims that smack of specification-searing.
Krugman piles on:
There is a negative correlation between debt and growth in the data; we can argue about how much of this represents reverse correlation. There is not, however, any red line at 90 percent. And that red line has been crucial to R-R’s influence — without the “OMG, we’re going to cross 90 percent unless we go for austerity now now now” factor, the paper would never have had the influence it’s had.
Karl Smith’s perspective:
The power of RR was that they claimed they had derived the critical mass for government debt. Stay below 90% of GDP and everything proceeds more or less according to traditional models. Reach critical mass and hold on to your hats.
Naturally, this scared the crap out people. There are things in this world to be afraid of, and criticalities are among them. Rogoff, in particular, was delighted at this. He wanted to protect the world from the dangers of debt and now he had in had the tool to do it. No more hemming and hawing. We needed action immediately or we might hit critical mass.
[The study] claimed to establish a correlation between high debt/GDP and low growth, and its fans turned this into proof that the high debt caused the low growth. But low growth also causes high debt. And what this suggests is that people seized on Reinhart and Rogoff’s finding because it validated an intuitively correct notion, that debt was dangerous. It established a nice, clear cut-off line, which is always handy when you’re trying to warn people of an amorphous long-term danger.
Both these arguments lead back to the same place — namely, that the political debate has been dominated by an imaginary fear. As a result, we’ve endured mass unemployment, a phenomenon with enormous and very long-term consequences.