If you ever follow American politics — if you glance at a newspaper, or have a Sunday morning talk show on in the background — you have probably heard the following fact: Economists believe that the national debt causes the economy to slow once it reaches 90 percent of the size of GDP. Even if you don’t remember this fact, it is embedded so deeply in the reporting and commentary on Washington that its influence is unmistakable.
The provenance of this fact is a paper by the economists Carmen Reinhart and Kenneth Rogoff. It turns out the paper was wrong. Some other economists tried to replicate its findings and discovered some basic errors. They left several crucial historical examples out of their study and miscoded some other cases on their spreadsheet. When fixed, the errors change the finding.
The finding led to quite a kerfuffle among economics bloggers. Newsweek’s libertarian/contrarian blogger Megan McArdle played the expected role of claiming “people are way overstating the impact that the 90% figure from Reinhart and Rogoff have had on austerity policies.” Probably someone, somewhere is overstating it — the Internet is large, and any given event will be overstated by somebody — but the impact of this study is very large. It was the intellectual basis for the Bowles-Simpson report. It was cited frequently by centrist editorials, news stories (which often read like editorials), Thomas Friedman, Joe Scarborough, and pretty much everybody in Congress.
If you want to make the case that the Reinhart-Rogoff whoopsie is no big deal, implying that nobody paid much attention to it is not the way to go. Everybody paid attention to it. The better case is that the finding was conceptually flawed in obvious ways. It 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. Studies — correct ones, as far as I know — show that employers won’t hire candidates who have been out of work for six months or longer. The millions of Americans who lost jobs beginning in 2007 were facing a ticking clock of deteriorating skills and employment networks, and the failure to spend whatever it took to get them back into the workforce doomed them to years or decades of misery (and financial drain to the government).
But as Washington has formulated its response to the crisis, the imaginary 90 percent debt threshold, not the very real six-month doomsday clock, was the one ticking in the background.