American Economic Review: Papers & Proceedings 100 (May 2010): 573578 http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.

573

Growth in a Time of Debt

By Carmen M. Reinhart and Kenneth S. Rogoff*
In this paper, we exploit a new multi-country historical dataset on public (government) debt to search for a systemic relationship between high public debt levels, growth and inflation.1 Our main result is 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 other wise; average (mean) growth rates are several percent lower. Surprisingly, the relationship between public debt and growth is remarkably similar across emerging markets and advanced economies. This is not the case for inflation. We find no systematic relationship between high debt levels and inflation for advanced economies as a group (albeit with individual country exceptions including the United States). By contrast, in emerging market countries, high public debt levels coincide with higher inflation. Our topic would seem to be a timely one. Public debt has been soaring in the wake of the recent global financial maelstrom, especially in the epicenter countries. This should not be surprising, given the experience of earlier severe financial crises.2 Outsized deficits and epic bank bailouts may be useful in fighting a downturn, but what is the long-run macroeconomic impact,
*Reinhart: Department of Economics, 4115 Tydings Hall, University of Maryland, College Park, MD 20742 (e-mail: creinhar@umd.edu); Rogoff: Economics Depart ment, 216 Littauer Center, Harvard University, Cambridge MA 021383001 (e-mail: krogoff@harvard.edu). The authors would like to thank Olivier Jeanne and Vincent R. Reinhart for helpful comments. 1 In this paper public debt refers to gross central government debt. Domestic public debt is government debt issued under domestic legal jurisdiction. Public debt does not include debts carrying a government guarantee. Total gross external debt includes the external debts of all branches of government as well as private debt that is issued by domestic private entities under a foreign jurisdiction. 2 Reinhart and Rogoff (2009a, b) demonstrate that the aftermath of a deep financial crisis typically involves a protracted period of macroeconomic adjustment, particularly in employment and housing prices. On average, public debt rose by more than 80 percent within three years after a crisis. 573

especially against the backdrop of graying populations and rising social insurance costs? Are sharply elevated public debts ultimately a manageable policy challenge? Our approach here is decidedly empirical, taking advantage of a broad new historical dataset on public debt (in particular, central government debt) first presented in Carmen M. Reinhart and Kenneth S. Rogoff (2008, 2009b). Prior to this dataset, it was exceedingly difficult to get more than two or three decades of public debt data even for many rich countries, and virtually impossible for most emerging markets. Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements, and historic circumstances. We also employ more recent data on external debt, including debt owed both by governments and by private entities. For emerging markets, we find that there exists a significantly more severe threshold for total gross external debt (public and private)which is almost exclusively denominated in a foreign currencythan for total public debt (the domestically issued component of which is largely denominated in home currency). When gross external debt reaches 60 percent of GDP, annual growth declines by about two percent; for levels of external debt in excess of 90 percent of GDP, growth rates are roughly cut in half. We are not in a position to calculate separate total external debt thresholds (as opposed to public debt thresholds) for advanced countries. The available time-series is too recent, beginning only in 2000. We do note, however, that external debt levels in advanced countries now average nearly 200 percent of GDP, with external debt levels being particularly high across Europe. The focus of this paper is on the longer term macroeconomic implications of much higher public and external debt. The final section, however, summarizes the historical experience of the United States in dealing with private sector

574
2007 = 100

AEA PAPERS AND PROCEEDINGS

Debt/GDP 2009
69 44 72 42

MAY 2010

100

150

200

250

Iceland Ireland UK Spain US Crisis country average Norway Australia China Thailand Mexico Malaysia Greece Canada Austria Chile Germany Japan Brazil Korea India Average for others

175.1 (increase of 75%)

84 62 22 9 21 29 25 47 119 47 62 4 44 182 46 32

This general rise in public indebtedness stands in stark contrast to the 20032006 period of public deleveraging in many countries and owes to direct bailout costs in some countries, the adoption of stimulus packages to deal with the global recession in many countries, and marked declines in government revenues that have hit advanced and emerging market economies alike.
II. Debt, Growth, and Inflation

120 (increase of 20%)

41 49

Figure 1. Cumulative Increase in Real Public Debt Since 2007, Selected Countries Note: Unless otherwise noted these figures are for central government debt deflated by consumer prices. Sources: Prices and nominal GDP from International Monetary Fund, World Economic Outlook. For a complete listing of sources for government debt, see Reinhart and Rogoff (2009b).

deleveraging of debts, normal after a financial crisis. Not surprisingly, such episodes are associated with very slow growth and deflation.
I. The 20072009 Global Buildup in Public Debt

Figure 1 illustrates the increase in (inflationadjusted) public debt that has occurred since 2007. For the five countries with systemic financial crises (Iceland, Ireland, Spain, the United Kingdom, and the United States), average debt levels are up by about 75 percent, well on track to reach or surpass the three year 86 percent benchmark that Reinhart and Rogoff (2009a,b), find for earlier deep postwar financial crises. Even in countries that did not experience a major financial crisis, debt rose by an average of about 20 percent in real terms between 2007 and 2009.3
3 Our focus on gross central government debt owes to the fact that time series of broader measures of government

The nonlinear effect of debt on growth is reminiscent of debt intolerance (Reinhart, Rogoff, and Miguel A. Savastano 2003) and presumably is related to a nonlinear response of market interest rates as countries reach debt tolerance limits. Sharply rising interest rates, in turn, force painful fiscal adjustment in the form of tax hikes and spending cuts, or, in some cases, outright default. As for inflation, an obvious connection stems from the fact that unanticipated high inflation can reduce the real cost of servicing the debt. Of course, the efficacy of the inflation channel is quite sensitive to the maturity structure of the debt. In principle, the manner in which debt builds up can be important. For example, war debts are arguably less problematic for future growth and inflation than large debts that are accumulated in peacetime. Postwar growth tends to be high as wartime allocation of manpower and resources funnels to the civilian economy. Moreover, high wartime government spending, typically the cause of the debt buildup, comes to a natural close as peace returns. In contrast, a peacetime debt explosion often reflects unstable political economy dynamics that can persist for very long periods. Here we will not attempt to determine the genesis of debt buildups but instead simply look at their connection to average and median growth and inflation outcomes. This may lead us, if anything, to understate the adverse growth implications of debt burdens arising out of the current crisis, which was clearly a peacetime event.

debt are not available for many countries. Of course, the true run-up in debt is significantly larger than stated here, at least on a present value actuarial basis, due to the extensive government guarantees that have been conferred on the financial sector in the crisis countries and elsewhere, where for example deposit guarantees were raised in 2008.

VOL. 100 NO. 2

5.0

Growth in a Time of Debt

6

575

GDP growth (bars, left axis)

5.5 4.0

GDP growth

3.0

Inflation (line, right axis)

4.5

2.0

3.5 1.0 3 0.0

Average Median Debt/ GDP below 30% Average Median Debt/ GDP 30 to 60% Average Median Debt/ GDP 60 to 90% Average Median Debt/ GDP above 90%

2.5

1.0

Figure 2. Government Debt, Growth, and Inflation: Selected Advanced Economies, 19462009 Notes: Central government debt includes domestic and external public debts. The 20 advanced economies included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States. The number of observations for the four debt groups are: 443 for debt/GDP below 30 percent; 442 for debt/GDP 30 to 60 percent; 199 observations for debt/GDP 60 to 90 percent; and 96 for debt/GDP above 90 percent. There are 1,180 observations. Sources: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

A. Evidence from Advanced Countries Figure 2 presents a summary of inflation and GDP growth across varying levels of debt for 20 advanced countries over the period 19462009. This group includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States. The annual observations are grouped into four categories, according to the ratio of debt to GDP during that particular year as follows: years when debt to GDP levels were below 30 percent (low debt); years where debt/GDP was 30 to 60 percent (medium debt); 60 to 90 percent (high); and

above 90 percent (very high). The bars in Figure 2 show average and median GDP growth for each of the four debt categories. Note that of the 1,186 annual observations, there are a significant number in each category, including 96 above 90 percent. (Recent observations in that top bracket come from Belgium, Greece, Italy, and Japan.) From the figure, it is evident that there is no obvious link between debt and growth until public debt reaches a threshold of 90 percent. The observations with debt to GDP over 90 percent have median growth roughly 1 percent lower than the lower debt burden groups and mean levels of growth almost 4 percent lower. (Using lagged debt does not dramatically change the picture.) The line in Figure 2 plots the median inflation for the different debt groupingswhich makes plain that there is no apparent pattern of simultaneous rising inflation and debt. Table 1 provides detail on the growth experience for individual countries, but over a much longer period, typically one to two centuries. Interestingly, introducing the longer time-series yields remarkably similar conclusions. Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP). Of course, there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy, however, that those highgrowth high-debt observations are clustered in the years following World War II. B. Evidence from Emerging Market Countries We next perform the same exercise for 24 emerging market economies for the periods 19462009 and 19002009, using comparable central government debt data to those we used for the advanced economies.4 Perhaps surprisingly, the results illustrated in Figure 2 and Table 1 for advanced economies are repeated for emerging market economies. The emerging

Inflation

4 While we have pre-1900 inflation, real GDP, and public debt data for many emerging markets, nominal GDP data is harder to find.

576

AEA PAPERS AND PROCEEDINGS Table 1Real GDP Growth as the Level of Government Debt Varies: Selected Advanced Economies, 17902009 (annual percent change) Below 30 percent 3.1 4.3 3.0 2.0 3.1 3.2 4.9 3.6 4.0 4.4 5.4 4.9 4.0 2.5 2.9 4.8 1.6 2.9 2.5 4.0 3.7 3.9 866 Central (federal) government debt/GDP 30 to 60 percent 4.1 3.0 2.6 4.5 1.7 3.0 2.7 0.9 0.3 4.5 4.9 3.7 2.8 2.9 4.4 2.5 3.3 2.9 2.2 3.4 3.0 3.1 654 60 to 90 percent 2.3 2.3 2.1 3.0 2.4 4.3 2.8 n.a. 4.8 4.0 1.9 3.9 2.4 3.9 n.a. 1.4 1.3 2.7 2.1 3.3 3.4 2.8 445 90 percent and above 4.6 n.a. 3.3 2.2 n.a. 1.9 2.3 n.a. 2.5 2.4 0.7 0.7 2.0 3.6 n.a. n.a. 2.2 n.a. 1.8 1.8 1.7 1.9 352

MAY 2010

Country Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden United Kingdom United States Average Median Observations =

Period 19022009 18802009 18352009 19252009 18802009 19132009 18802009 18802009 18842009 19492009 18802009 18852009 18802009 19322009 18802009 18512009 18502009 18802009 18302009 17902009

2,317

Notes: An n.a. denotes no observations were recorded for that particular debt range. There are missing observations, most notably during World War I and II years; further details are provided in the data appendices to Reinhart and Rogoff (2009b) and are available from the authors. Minimum and maximum values for each debt range are shown in bolded italics. Sources: There are many sources; among the more prominent are: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance. Extensive other sources are cited in Reinhart and Rogoff (2009).

market equivalents of Figure 2 and Table 1 are not reproduced here (to economize on space), but the interested reader is referred to the NBER working paper version of this paper. For 19002009, for example, median and average GDP growth hovers around 44.5 percent for levels of debt below 90 percent of GDP, but median growth falls markedly to 2.9 percent for high debt (above 90 percent); the decline is even greater for the average growth rate, which falls to 1 percent. With much faster population growth than the advanced economies, the implications for per capita GDP growth are in line (or worse) with those shown for advanced economies. The similarities with advanced economies end there, as higher debt levels are associated

with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern. Because emerging markets often depend so much on external borrowing, it is interesting to look separately at thresholds for external debt (public and private). In Figure 3, we highlight the connection between gross external debt as reported by the World Bank and growth and inflation. As one can see, the growth thresholds for external debt are considerably lower than the thresholds for total public debt. Growth deteriorates markedly at external debt levels over

VOL. 100 NO. 2

GDP growth (bars, left axis) Inflation (line, right axis)

Growth in a Time of Debt

17

577

5.5

16

4.5

15 3.5

14 2.5

1.5

13

0.5

12

0.5

Average Median Debt/GDP below 30%

Average

Median

Average

Median

Average

Median

Debt/GDP 30 to 60%

Debt/GDP 60 to 90%

Debt/GDP above 90%

11

1.5

10

Figure 3. External Debt, Growth, and Inflation: Selected Emerging Markets, 1970-2009 Notes: The 20 emerging market countries included are Argentina, Bolivia, Brazil, Chile, China, Colombia, Egypt, India, Indonesia, Korea, Malaysia, Mexico, Nigeria, Peru, Philippines, South Africa, Thailand, Turkey, Uruguay, and Venezuela. The number of observations for the four debt groups are: 252 for debt/GDP below 30 percent; 309 for debt/GDP 30 to 60 percent; 120 observations for debt/GDP 60 to 90 percent; and 74 for debt/GDP above 90 percent. There is a total of 755 annual observations. Sources: International Monetary Fund, World Economic Outlook, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

have shown that public levels of debt/GDP that push the 90 percent threshold are associated with lower median and average growth.5 These observations, however, present only a partial picture of the post-financial crisis landscape. Private debt, in contrast, tends to shrink sharply in the aftermath of a financial crisis. Just as a rapid expansion in private credit fuels the boom phase of the cycle, so does serious deleveraging exacerbate the post-crisis downturn. This pattern is illustrated in Figure 4, which shows the ratio of private debt to GDP for the United States for 19162009. Periods of sharp deleveraging have followed periods of lower growth and coincide with higher unemployment. In varying degrees, the private sector (households and firms) in many other countries (notably both advanced and emerging Europe) are also unwinding the debt built up during the boom year. Thus, private deleveraging may be another legacy of the financial crisis that may dampen growth in the medium term.
IV. Concluding Remarks

GDP growth

Inflation

60percent, and further still when external debt levels exceed 90 percent, which record outright declines. In light of this, it is more understandable that over one half of all defaults on external debt in emerging markets since 1970 occurred at levels of debt that would have met the Maastricht criteria of 60 percent. Inflation becomes significantly higher only for the group of observations with external debt over 90 percent.
III. Private Sector Debt: An Illustration

Our main focus has been on central government debt and, to a lesser degree, external public and private debt, since reliable data on private domestic debts are much scarcer across countries and time. We have argued here and elsewhere that a key legacy of a deep financial crisis is rapidly expanding public debt. Furthermore, we

The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 20072009 financial crises in the United States and elsewhere. We examine the experience of 44 countries spanning up to two centuries of data on central government debt, inflation and growth. Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. Much lower levels of external debt/ GDP (60 percent) are associated with adverse outcomes for emerging market growth. Seldom do countries grow their way out of debts. The nonlinear response of growth to debt as debt grows towards historical boundaries is reminiscent of the debt intolerance phenomenon developed in Reinhart, Rogoff, and Savastano (2003). As countries hit debt tolerance ceilings, market interest rates can begin to rise quite suddenly, forcing painful adjustment. Of course, there are other vulnerabilities associated with debt buildups, particularly if governments try to mitigate servicing costs by

5 It is important to note that post-crises increases in public debt do not necessarily push economies into the vulnerable 90+ debt/GDP range.

578

AEA PAPERS AND PROCEEDINGS

MAY 2010

320 270
Years with debt/GDP declines All other years

Median unemployment rate

19161939 19462009

9.8 6.7

7.2 5.5

Percent

220 170 120 70 20

1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Historical statistics of the United States Flow of funds

Figure 4. United States: Private Debt Outstanding, 19162009 (end-of-period stock of debt as a percent of GDP) Note: Data for 2009 is end-of-June. Sources: Historical Statistics of the United States, Flow of Funds, Board of Governors of the Federal Reserve, International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

shortening the maturing structure of debt. As Reinhart and Rogoff (2009b) emphasize and numerous models suggest, countries that choose to rely excessively on short-term borrowing to fund growing debt levels are particularly vulnerable to crises in confidence that can provoke very sudden and unexpected financial crises. At the very minimum, this would suggest that traditional debt management issues should be at the forefront of public policy concerns. REFERENCES
Reinhart, Carmen M., and Kenneth S. Rogoff.

Debt. National Bureau of Economic Research Working Paper 13946.

Reinhart, Carmen M., and Kenneth S. Rogoff.

2009a. The Aftermath of Financial Crises. American Economic Review, 99(2): 46672.
Reinhart, Carmen M., and Kenneth S. Rogoff.

2009b. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.
Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. Savastano. 2003. Debt Intoler-

2008. The Forgotten History of Domestic

ance. Brookings Papers on Economic Activity (1), ed. William C. Brainard and George L. Perry, 162.

I. Introduction
In this paper, we exploit a new multi-country historical data set on central government debt as well as more recent data on external (public and private) debt to search for a systematic relationship between debt levels, growth and inflation.
1

Our main result is that whereas the link between growth and

debt seems relatively weak at normal debt levels, median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower. Surprisingly, the relationship between public debt and growth is remarkably similar across emerging markets and advanced economies. Emerging markets do face a much more

binding threshold for total gross external debt (public and private)which is almost exclusively denominated in a foreign currency. We find no systematic relationship between high debt levels and
inflation for advanced economies as a group (albeit with individual country exceptions including the United States). By contrast, inflation rates are markedly higher in emerging market countries with higher public debt levels.

Our topic would seem to be a timely one. Government debt has been soaring in the wake of the recent global financial maelstrom, especially in the epi-center countries. This might have been expected. Using a benchmark of 14 earlier severe post-World-War II financial crises, we demonstrated (one year ago) that central government debt rises, on average, by about 86 percent within three years after the crisis.2

In this paper public debt refers to gross central government debt. Domestic public debt is government debt issued under domestic legal jurisdiction. Public debt does not include debts carrying a government guarantee. Total gross external debt includes the external debts of all branches of government as well as private debt that is issued by domestic private entities under a foreign jurisdiction.

Reinhart and Rogoff (2009a, b) demonstrate that the aftermath of a deep financial crisis typically involves a protracted period of macroeconomic adjustment, particularly in employment and housing prices.

Outsized deficits and epic bank bailouts may be useful in fighting a downturn, but what is the long run macroeconomic impact or higher levels of government debt, especially against the backdrop of graying populations and rising social insurance costs? Our approach here is decidedly empirical, taking advantage of a broad new historical data set on public debt (in particular, central government debt), first presented in Reinhart and Rogoff (2008, 2009b). Prior to this data set, it was exceedingly difficult to get more than two or three decades of public debt data even for many rich countries, and virtually impossible for most emerging markets. 3 Our results incorporate data on forty-four countries spanning about two hundred years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements, and historic circumstances. We also employ more recent data on external debt, including both debt owed by governments and by private entities. For emerging markets, we find that there exists a significantly more severe threshold for total gross external debt (public and private) -- which tends to be almost exclusively denominated in a foreign currency -- than for total public debt (the domestically-issued component of which is largely denominated in home currency.) When gross external debt reaches 60 percent of GDP, annual growth declines by about two percent; for levels of external debt in excess of 90 percent of GDP, growth rates are roughly cut in half. We are not in a position to calculate separate total external debt thresholds (as opposed to public debt thresholds) for advanced countries. The available time series is too recent, beginning only in early 2000s as a byproduct of the International Monetary Fund efforts and creation of the Special

For other related efforts on developing cross country public debt data bases, including Reinhart, Rogoff and Savasatano (2003) and Jeanne and Guscina (2006), see the discussion in Reinhart and Rogoff (2009b).

Data Dissemination Standard (SDDS). We do note, however, that external debt levels in advanced countries now average about 200 percent of GDP, with external debt levels being particularly high across Europe. The focus of this paper is on the longer term macroeconomic implications of much higher public and external debt. The final section, however, discusses the role of private domestic debt examining the historical experience of the United States. We highlight episodes of private sector deleveraging of debts, normal after a systemic financial crisis; not surprisingly, such episodes are associated with very slow growth and deflation. II. The Global 2007-2009 Buildup in Public Debt Figure 1 illustrates the increase in (inflation adjusted) public debt that has occurred since 2007. For the five countries with systemic financial crises (Iceland, Ireland, Spain, the United Kingdom, and the United States), average debt levels are up by about 75 percent, well on track to reach or surpass the three year 86 percent benchmark that Reinhart and Rogoff (2009a,b) find for earlier deep post-war financial crises. Even in countries that have not experienced a major financial crisis, debt rose an average of about 20 percent in real terms between 2007 and 2009.4 This general rise in public indebtedness stands in stark contrast to the 2003-2006 period of public deleveraging in many countries and owes to direct bail-out costs in some countries, the adoption of stimulus packages to deal with the global recession in many countries, and marked declines in government revenues that have hit advanced and emerging market economies alike.

Our focus on gross central government debt owes to the fact that time series of broader measures government are not available for many countries. Of course, the true run-up in debt is significantly larger than stated here, at least on a present value actuarial basis, due to the extensive government guarantees that have been conferred on the financial sector in the crisis countries and elsewhere.

Figure 1. Cumulative Increase in Real Public Debt Since 2007, Selected Countries

2007 = 100

100

150

200

250

Iceland Ireland UK Spain US Crisis country average Norway Australia China Thailand Mexico Malaysia Greece Canada Austria Chile Germany Japan Brazil Korea India Average for others

175.1 (increase of 75%)

Debt/GDP 2009 69 44 72 42 84 62 22 9 21 29 25 47 119 47 62 4 44 182 46 32 41 49

120 (increase of 20%)

Notes: Unless otherwise noted these figures are for central government debt deflated by consumer prices. Sources: Prices and nominal GDP from International Monetary Fund, World Economic Outlook. For a complete listing of sources for government debt, see Reinhart and Rogoff (2009b).

III. Debt, Growth, and Inflation The simplest connection between public debt and growth is suggested by Robert Barro (1979). Assuming taxes ultimately need to be raised to achieve debt sustainability, the distortionary impact imply is likely to lower potential output. Of course, governments can also tighten by reducing spending, which can also be contractionary. As for inflation, an obvious connection stems from the fact that unanticipated high inflation can reduce the real cost of servicing the debt. Of course, the efficacy of the inflation channel is quite sensitive to the maturity structure of the debt. Whereas long-term nominal government debt is extremely vulnerable to inflation, short term debt is far less so. Any government that attempts to inflate away the real value of short term debt will soon find itself paying much higher interest rates. In principle, the manner in which debt builds up can be important. For example, war debts are arguably less problematic for future growth and inflation than large debts that are accumulated in peace time. Postwar growth tends to be high as war-time allocation of manpower and resources funnels to the civilian economy. Moreover, high war-time government spending, typically the cause of the debt buildup, comes to a natural close as peace returns. In contrast, a peacetime debt explosion often reflects unstable underlying political economy dynamics that can persist for very long periods. Here we will not attempt to discriminate the genesis of debt buildups, and instead simply look at their connection to average and median growth and inflation outcomes. This may lead us, if anything, to understate the adverse growth implications of debt burdens arising out of the current crisis, which was clearly a peace time event.

A. Evidence from Advanced Countries Figure 2 presents a summary of inflation and GDP growth across varying levels of debt for twenty advanced countries over the period 1946-2009. This group includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States. The annual observations are grouped into four categories, according to the ratio of debt-to GDP during that particular year as follows: years when debt to GDP levels were below 30 percent (low debt); years where debt/GDP was 30 to 60 percent (medium debt); 60 to 90 percent (high); and above 90 percent (very high). 5 The bars in Figure 2 show average and median GDP growth for each of the four debt categories. Note that of the 1186 annual observations, there are a significant number in each category, including 96 above 90 percent. (Recent observations in that top bracket come from Belgium, Greece, Italy, and Japan.) From the figure, it is evident that there is no obvious link between debt and growth until public debt reaches a threshold of 90 percent. The observations with debt to GDP over 90 percent have median growth roughly 1 percent lower than the lower debt burden groups and mean levels of growth almost 4 percent lower. (Using lagged debt should not dramatically change the picture.) The line in Figure 2 plots the median inflation for the different debt groupingswhich makes plain that there is no apparent pattern of simultaneous rising inflation and debt. 6

The four buckets encompassing low, medium-low, medium-high, and high debt levels are based on our interpretation of much of the literature and policy discussion on what is considered low, high etc debt levels. It parallels the World Bank country groupings according to four income groups. Sensitivity analysis involving a different set of debt cutoffs merits exploration as do country-specific debt thresholds along the broad lines discussed in Reinhart, Rogoff, and Savastano (2003). 6 See Appendix Tables 1 and 2 for 1946-2009 summary statistics on growth and inflation, respectively, for advanced economies and emerging markets.

Figure 2. Government Debt, Growth, and Inflation: Selected Advanced Economies, 1946-2009
5.0 GDP growth (bars, left axis) 5.5 4.0 6

Inflation (line, right axis) 3.0 GDP growth

4.5

2.0

3.5 1.0

0.0 Average Median Debt/GDP below 30% -1.0 Average Median Debt/GDP 30 to 60% Average Median Debt/GDP 60 to 90% Average Median Debt/GDP above 90% 2.5

Notes: Central government debt includes domestic and external public debts. The 20 advanced economies included are Australia. Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States. The number of observations for the four debt groups are: 443 for debt/GDP below 30%; 442 for debt/GDP 30 to 60%; 199 observations for debt/GDP 60 to 90%; and 96 for debt/GDP above 90%. There are 1,180 observations. Sources: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

Inflation

There are exceptions to this inflation result, as Figure 3 makes plain for the Unites States, where debt levels over 90% of GDP are linked to significantly elevated inflation. Figure 3 spans 17912009, but the pattern for the post-war period taken alone is very similar.

Figure 3. United States Central (Federal) Government Debt, Growth, and Inflation: 1790-2009
5.0 GDP growth (bars, left axis) Debt/GDP below 30% 4.0 Debt/GDP 30 to 60% Debt/GDP 60 to 90% Inflation (line, right axis) 6 7

3.0

2.0 GDP growth

4 Inflation

1.0

Debt/GDP above 90% 0.0 Average Median Average Median Average Median Average Median 2

-1.0

-2.0

Notes: Central government debt is gross debt. The number of observations for the four debt groups are: 129 for debt/GDP below 30%; 59 for debt/GDP 30 to 60%; 23 observations for debt/GDP 60 to 90%; and 5 for debt/GDP above 90%, for a total of 216 observations. Sources: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance, ), US Treasury Direct, Reinhart and Rogoff (2009) and sources cited therein.

10

Table 1 provides detail on the growth experience for individual countries, but over a much longer period, typically one to two centuries. Interestingly, introducing the longer time series yields remarkably similar conclusions. Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP). Of course, there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy, however, that those high-growth high-debt observations are clustered in the years following World War II.

11

Table 1. Real GDP Growth as the Level of Government Debt Varies: Selected Advanced Economies, 1790-2009 (annual percent change)
Country Period Below 30 percent 3.1 4.3 3.0 2.0 3.1 3.2 4.9 3.6 4.0 4.4 5.4 4.9 4.0 2.5 2.9 4.8 1.6 2.9 2.5 4.0 3.7 3.9 866 Central (Federal) government debt/ GDP 30 to 60 60 to 90 90 percent and percent percent above 4.1 2.3 4.6 3.0 2.3 n.a. 2.6 2.1 3.3 4.5 3.0 2.2 1.7 2.4 n.a. 3.0 4.3 1.9 2.7 2.8 2.3 0.9 n.a. n.a. 2.5 0.3 4.8 4.5 4.0 2.4 1.9 0.7 4.9 3.7 3.9 0.7 2.8 2.4 2.0 2.9 3.9 3.6 4.4 n.a. n.a. 2.5 1.4 n.a. 3.3 2.2 1.3 2.9 2.7 n.a. 2.2 2.1 1.8 3.4 3.3 -1.8 3.0 3.4 1.7 3.1 2.8 1.9 654 445 352

Australia 1902-2009 Austria 1880-2009 Belgium 1835-2009 Canada 1925-2009 Denmark 1880-2009 Finland 1913-2009 France 1880-2009 Germany 1880-2009 Greece 1884-2009 Ireland 1949-2009 Italy 1880-2009 Japan 1885-2009 Netherlands 1880-2009 New Zealand 1932-2009 Norway 1880-2009 Portugal 1851-2009 Spain 1850-2009 Sweden 1880-2009 United Kingdom 1830-2009 United States 1790-2009 Average Median Number of observations = 2,317

Notes: An n.a. denotes no observations were recorded for that particular debt range. There are missing observations, most notably during World War I and II years; further details are provided in the data appendices to Reinhart and Rogoff (2009) and are available from the authors. Minimum and maximum values for each debt range are shown in bolded italics. Sources: There are many sources, among the more prominent are: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance. Extensive other sources are cited Reinhart and Rogoff (2009).

B. Evidence from Emerging Market Countries We next perform the same debt ratio exercise for 24 emerging market economies for the periods 1946-2009 and 1900-2009, using comparable central government debt data as we used for the advanced economies. 7 Perhaps surprisingly, the results illustrated in Figure 4 and Table 2 for emerging markets largely repeat the results in Figure 2 and Table 1. For 1900-2009, for

While we have pre-1900 inflation, real GDP, and public debt data for many emerging markets, nominal GDP data is seldom available.

12

example, median and average GDP growth hovers around 4-4.5 percent for levels of debt below 90 percent of GDP but median growth falls markedly to 2.9 percent for high debt (above 90 percent); the decline is even greater for the average growth rate, which falls to 1 percent. With much faster population growth than the advanced economies, the implications for per capita GDP growth are in line (or worse) with those shown for advanced economies. The similarities with advanced economies end there, as higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than 7 percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. 8 Fiscal dominance is a plausible interpretation of this pattern.

See Appendix Tables 1 and 2 for 1946-2009 summary statistics on growth and inflation, respectively, for advanced economies and emerging markets.

13

Figure 4. Public Debt, Growth, and Inflation: Selected Emerging Markets, 1946-2009
6.0 Median Inflation (line, right axis) 17 Debt/GDP 30 to 60% Debt/GDP 60 to 90% 15 19

GDP growth (bars, left axis) 5.5 Debt/GDP below 30%

5.0

4.5

4.0 13 Debt/GDP above 90% Inflation 3.5 GDP growth 11

3.0

2.5

2.0 7 1.5

1.0 Average Median Average Median Average Median Average Median

Notes: The 24 emerging market countries included are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Ghana, India, Indonesia, Kenya, Korea, Malaysia, Mexico, Nigeria, Peru, Philippines, Singapore, South Africa, Sri Lanka, Thailand, Turkey, Uruguay, and Venezuela. The number of observations for the four debt groups are: 502 for debt/GDP below 30%; 385 for debt/GDP 30 to 60%; 145 observations for debt/GDP 60 to 90%; and 110 for debt/GDP above 90%. There are a total of 1142 annual observations. Sources: International Monetary Fund, World Economic Outlook, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

14

Table 2. Real GDP Growth as the Level of Government Debt Varies: Selected Emerging Market Economies, 1900-2009 (annual percent change)
Country Period Below 30 percent 4.3 0.7 3.2 4.0 4.3 6.9 5.3 3.6 n.a. 4.2. 6.6 6.3 2.0 4.1 5.4 4.3 5.0 n.a. 2.0 3.3 6.1 5.4 2.1 6.5 4.3 4.5 686 Central (Federal) government debt/ GDP 30 to 60 60 to 90 90 percent and percent percent above 2.7 3.6 0.5 5.2 3.7 3.9 2.3 2.6 2.3 7.5 -4.5 1.0 3.0 n.a. n.a. 5.0 3.4 3.0 5.0 3.2. 1.5 2.6 n.a. n.a. 4.6 4.7 1.9 4.9 n.a. n.a. 6.3 3.1 -0.1 4.2 2.3 1.2 6.2 6.9 5.5 3.4 1.2. -0.7 2.6. 10.6 11.2 2.9 2.7 n.a. 3.8 5.1 n.a. 9.5 8.2 4.0. 3.5 n.a. n.a. 3.7 4.2 5.0 6.6 n.a. n.a. 3.7 3.2 -6.4 3.1 3.2 0.0 4.1 3.2 -6.5 4.1 4.2 1.0 4.4 4.5 2.9 450 148 113

Argentina 1900-2009 Bolivia 1950-2009 Brazil 1980-2009 Chile 1900-2009 Colombia 1923-2009 Costa Rica 1950-2009 Ecuador 1939-2009 El Salvador 1939-2009 Ghana 1952-2009 India 1950-2009 Indonesia 1972-2009 Kenya 1963-2009 Malaysia 1955-2009 Mexico 1917-2009 Nigeria 1990-2009 Peru 1917-2009 Philippines 1950-2009 Singapore 1969-2009 South Africa 1950-2009 Sri Lanka 1950-2009 Thailand 1950-2009 Turkey 1933-2009 Uruguay 1935-2009 Venezuela 1921-2009 Average Median Number of observations = 1,397

Notes: An n.a. denotes no observations were recorded for that particular debt range. There are missing observations for some years details are provided in the data appendices to Reinhart and Rogoff (2009) and are available from the authors. Minimum and maximum values for each debt range are shown in bolded italics. Sources: There are many sources, among the more prominent are: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance. Extensive other sources are cited Reinhart and Rogoff (2009).

15

C. External Debts Because emerging markets often depend so much on external borrowing, it is interesting to look separately at thresholds for external debt (combined public and private). Combined public and private sector debt is of interest because in the case of crisis, the distinction between public and private often becomes blurred in a maze of bailouts, guarantees, and international hard currency constraints (see Reinhart and Rogoff, 2009b). In Figure 5, we highlight the connection between for gross external debt as reported by the World Bank and growth and inflation. As one can see, the growth thresholds for external debt are considerably lower than for the thresholds for total public debt. Growth deteriorates markedly at external debt levels over 60 percent, and further still when external debt levels exceed 90 percent, which record outright declines. In light of this, it is more understandable that over one half of all defaults on external debt in emerging markets since 1970 occurred at levels of debt that would have met the Maastricht criteria of 60 percent or less. Inflation becomes significantly higher only for the group of observations with external debt over 90 percent.

16

Figure 5. External Debt, Growth, and Inflation: Selected Emerging Markets, 1970-2009

17 GDP growth (bars, left axis) 5.5

4.5

Inflation (line, right axis)

16

15 3.5

14 Inflation 13 1.5 12 0.5 Average -0.5 Median Average Median Average Median Average Median 11 Debt/GDP below 30% Debt/GDP 30 to 60% Debt/GDP 60 to 90% Debt/GDP above 90% 10 2.5 GDP growth

-1.5

Notes: External debt includes public and private debts. The 20 emerging market countries included are Argentina, Bolivia, Brazil, Chile, China, Colombia, Egypt, India, Indonesia, Korea, Malaysia, Mexico, Nigeria, Peru, Philippines, South Africa, Thailand, Turkey, Uruguay, and Venezuela. The number of observations for the four debt groups are: 252 for debt/GDP below 30%; 309 for debt/GDP 30 to 60%; 120 observations for debt/GDP 60 to 90%; and 74 for debt/GDP above 90%. There is a total of 755 annual observations. Sources: International Monetary Fund, World Economic Outlook, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

17

As noted in the introduction, there is no comparable long time series on total external debt for advanced countries; the relatively new IMF data set we use begins only in 2003. Although we have no historical benchmarks for the advanced countries, the summary results in Figure 6, based on 2003-2009 gross external debt as a percent of GDP, is indeed disconcerting. The left hand panel of the figure indicates whether there has been an increase in indebtedness to GDP over the 2003-09 period, or a decrease (deleveraging.). The right hand panel gives the ratio of gross external debt to GDP as of the end of the second quarter of 2009. The group averages are based on a total data set of 59 countries.

18

Figure 6. Gross External Debt as a Percent of GDP: Averages for Selected 59 Countries, 2003-2009 (in percent)

-30

Change in debt-to-GDP ratio, 2003-2009 -10 10 30 50 Europe-Advanced Europe-Emerging United States Australia & Canada Asia-Emerging Former Soviet Union Increased indebtedness Japan Africa Asia (ex. Hong Kong) Latin America

Debt-to-GDP ratio
0 50 100 150 200

Deleveraging Advanced economies Emerging markets

Sources: International Monetary Fund, World Economic Outlook, World, Bank, Quarterly External Debt Statistics (QUEDS), and authors calculations. Notes: Data for 2009 end in the second quarter. The countries participating in QUEDS included in these calculations are listed in what follows by region. Advanced-Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, (15 countries). If Ireland were included, the averages would be substantially higher for this group. Emerging Europe: Bulgaria, Croatia, Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, and Turkey, (11 countries). Former Soviet Union: Armenia, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, and the Ukraine (8 countries). Africa: Egypt, South Africa, and Tunisia (3 countries). Asia-Emerging: Hong Kong, India, Indonesia, Korea, Malaysia, Thailand (6 countries). Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Mexico, Paraguay, Peru, and Uruguay (12 countries). There are a total of 19 advanced economies and 40 emerging markets.

19

As the right hand side of the figure illustrates, external debt burdens are particularly high in Europe, with an average external debt to GDP ratio across advanced European economies of over 200 percent, and an average external debt to GDP across emerging European economies roughly 100 percent.9 (The fact that a sizable share of these debts are intra-European may or may prove a significant mitigating factor.) Interestingly, the United States gross debt liabilities are less than half of Europes as a share of GDP, despite the countrys epic sequence of trade balance deficits. Japan, despite having a gross public debt to GDP ratio approaching 200 percent, has much smaller gross external liabilities still, thanks in no small part to Japans famously strong home bias in bond holdings. Famously profligate Latin America, by contrast to the advanced economies, now has gross external debt liabilities averaging only around 50 percent of GDP. Moreoever, in contrast to the advanced countries who added an average of 50 percent of GDP to gross external debt during the recent period, Latin American countries actually delivered external debt by over 30 percent of GDP. Of course, given the lack of sufficient long-dated historical data on advanced economies external debts, it is not possible to know whether they face similar thresholds to emerging markets. It is likely that the thresholds are higher for advanced economies that issue most external debt in their own currency.

IV. Private Sector Debt: An Illustration

In effect, if Ireland is added to the list, the average for advanced European economies rises to 266 percent!.

20

Our main focus has been on total public and total external debt, since reliable data on private internal domestic debts are much scarcer across countries and time. We have shown that public levels of debt/GDP that push the 90 percent threshold are associated with lower median and average growth; for emerging markets there are even stricter thresholds for external debt while growth thresholds for advanced economies remains an open question due to the fact only very recent data is available.10 These observations, however, present only a partial picture of the post-financial crisis landscape, particularly for the years immediately following the crisis. Private debt, in contrast to public debt, tends to shrink sharply for an extended period after a financial crisis. Just as a rapid expansion in private credit fuels the boom phase of the cycle, so does serious deleveraging exacerbate the post-crisis downturn. Just as a rapid expansion in private credit fuels the boom phase of the cycle, so does serious deleveraging exacerbate the post-crisis downturn. This pattern is illustrated in Figure 7, which shows the ratio of private debt to GDP for the United States for 1916-2009. Periods of sharp deleveraging have followed periods of lower growth and coincide with higher unemployment (as shown in the inset to the figure). In varying degrees, the private sector (households and firms) in many other countries (notably both advanced and emerging Europe) are also unwinding the debt built up during the boom years. Thus, private deleveraging may be another legacy of the financial crisis that may dampen growth in the medium term.

10

It is important to note that post crises increases in public debt do not necessarily push economies in to the vulnerable 90+ debt/GDP range.

21

Figure 7. United States: Private Debt Outstanding, 1916-2009 (end-of- period stock of debt as a percent of GDP)

Percent

320

270

Years with Debt/GDP declines All other years

Median Unemployment rate 1916-1939 1946-2009 9.8 7.2 6.7 5.5

220

170
Flow of Funds Historical Statistics of the United States

120

70

20
1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Notes: Data for 2009 is end-of-June. Sources: Historical Statistics of the United States, Flow of Funds, Board of Governors of the Federal Reserve International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance, and Reinhart and Rogoff (2009b) and sources cited therein.

V. Concluding Remarks The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 2007-2009 financial crises in the United States and elsewhere. We examine the experience of forty four countries spanning up to two centuries of data on central government debt, inflation and growth. Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. In addition, for emerging markets, there appears to be a more stringent

22

threshold for total external debt/GDP (60 percent), that is also associated with adverse outcomes for growth. Seldom do countries simply grow their way out of deep debt burdens. Why are there thresholds in debt, and why 90 percent? This is an important question that merits further research, but we would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of debt intolerance in Reinhart, Rogoff, and Savastano (2003). As we argued in that paper, debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity analysis. A general result of our debt intolerance analysis, however, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs. Even countries that are committed to fully repaying their debts are forced to dramatically tighten fiscal policy in order to appear credible to investors and thereby reduce risk premia. The link between indebtedness and the level and volatility of sovereign risk premia is an obvious topic ripe for revisiting in light of the more comprehensive cross-country data on government debt. Of course, there are other vulnerabilities associated with debt buildups that depend on the composition of the debt itself. As Reinhart and Rogoff (2009b, ch. 4) emphasize and numerous models suggest, countries that choose to rely excessively on short term borrowing to fund growing debt levels are particularly vulnerable to crises in confidence that can provoke very sudden and unexpected financial crises. Similar statements could be made about foreign versus domestic debt, as discussed. At the very minimum, this would suggest that traditional debt management issues should be at the forefront of public policy concerns. Finally, we note that even aside from high and rising levels of public debt, many advanced countries, particularly in Europe, are presently saddled with extraordinarily high levels

23

of total external debt, debt issued abroad by both the government and private entities. In the case Europe, the advanced country average exceeds 200 percent external debt to GDP. Although we do not have the long-dated time series needed to calculate advanced country external debt thresholds as we do for emerging markets, current high external debt burdens would also seem to be an important vulnerability to monitor.

REFERENCES Barro, Robert J. 1979. On the Determination of the Public Debt, The Journal of Political Economy, Vol. 85, No. 5: 940-971. Jeanne, Olivier and Anastasia Gucina 2006. Government Debt in Emerging Market Countries: A New Data Set. International Monetary Fund Working Paper 6/98. Washington DC. Reinhart, Carmen M., and Kenneth S. Rogoff. 2009a. The Aftermath of Financial Crises. American Economic Review, Vol. 99, No. 2: 466-472. Reinhart, Carmen M., and Kenneth S. Rogoff. 2009b. This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton Press. Reinhart, Carmen M., and Kenneth S. Rogoff, and Miguel Savastano. 2003. Debt Intolerance in William Brainerd and George Perry (eds.), Brookings Papers on Economic Activity.

24

Appendix Table 1. Real GDP Growth as the Level of Debt Varies: Summary (annual percent change)
Measure Below 30 30 to 60 60 to 90 percent percent percent Central (Federal) government debt/ GDPAdvanced economies 1946-2009 4.1 2.8 2.8 1946-2009 4.2 3.0 2.9 Emerging Markets 1946-2009 4.3 4.8 4.1 1946-2009 5.0 4.7 4.6 Total (public plus private) Gross External Debt/GDP 1970-2009 5.2 4.9 2.5 1970-2009 5.1 5.0 3.2 Period 90 percent and above

Average Median Average Median Average Median

-0.1 1.6 1.3 2.9 -0.2 2.4

Appendix Table 2. Inflation as the Level of Debt Varies: Summary (annual percent change)
Measure Below 30 30 to 60 60 to 90 percent percent percent Central (Federal) government debt/ GDP Advanced economies 1946-2009 6.4 6.3 6.4 1946-2009 5.2 3.7 3.5 Emerging Markets 1946-2009 64.8 39.4 105.9 1946-2009 6.0 7.5 11.7 Total (public plus private) Gross External Debt/GDP 1970-2009 10.3 17.0 37.1 1970-2009 10.9 12.1 13.2 Period 90 percent and above

Average Median Average Median Average Median

5.1 3.9 119.6 16.5 23.4 16.6

25

Debt, Growth and the Austerity Debate - NYTimes.com

5/1/13 9:28 PM

April 25, 2013

Debt, Growth and the Austerity Debate

By CARMEN M. REINHART and KENNETH S. ROGOFF

CAMBRIDGE, Mass. IN May 2010, we published an academic paper, Growth in a Time of Debt. Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt specifically, gross public debt equaling 90 percent or more of the nations annual economic output was associated with notably lower rates of growth. Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited and, often, exaggerated or misrepresented by politicians, commentators and activists across the political spectrum. Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. But they also accused us of serious errors stemming from selective exclusion of relevant data and unconventional weighting of statistics charges that we vehemently dispute. (In an onlineonly appendix accompanying this essay, we explain the methodological and technical issues that are in dispute.) Our research, and even our credentials and integrity, have been furiously attacked in newspapers and on television. Each of us has received hate-filled, even threatening, e-mail messages, some of them blaming us for layoffs of public employees, cutbacks in government services and tax increases. As career academic economists (our only senior public service has been in the research department at the International Monetary Fund) we find these attacks a sad commentary on the politicization of social science research. But our feelings are not whats important here. The authors of the paper released last week Thomas Herndon, Michael Ash and Robert Pollin say our findings have served as an intellectual bulwark in support of austerity politics and urge policy makers to reassess the austerity agenda itself in both Europe and the United States.

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Debt, Growth and the Austerity Debate - NYTimes.com

5/1/13 9:28 PM

A sober reassessment of austerity is the responsible course for policy makers, but not for the reasons these authors suggest. Their conclusions are less dramatic than they would have you believe. Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon. The academic literature on debt and growth has for some time been focused on identifying causality. Does high debt merely reflect weaker tax revenues and slower growth? Or does high debt undermine growth? Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places. In a paper published last year with Vincent R. Reinhart, we looked at virtually all episodes of sustained high debt in the advanced economies since 1800. Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested. We did find that episodes of high debt (90 percent or more) were rare, long and costly. There were just 26 cases where the ratio of debt to G.D.P. exceeded 90 percent for five years or more; the average high-debt spell was 23 years. In 23 of the 26 cases, average growth was slower during the high-debt period than in periods of lower debt levels. Indeed, economies grew at an average annual rate of roughly 3.5 percent, when the ratio was under 90 percent, but at only a 2.3 percent rate, on average, at higher relative debt levels. (In 2012, the ratio of debt to gross domestic product was 106 percent in the United States, 82 percent in Germany and 90 percent in Britain in Japan, the figure is 238 percent, but Japan is somewhat exceptional because its debt is held almost entirely by domestic residents and it is a creditor to the rest of the world.) The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle. In This Time Is Different, our 2009 history of financial crises over eight centuries, we found that when sovereign debt reached unsustainable levels, so did the cost of borrowing, if it was even possible at all. The current situation confronting Italy and Greece, whose debts date from the early 1990s, long before the 2007-8 global financial crisis, support this view. The politically charged discussion, especially sharp in the past week or so, has falsely equated our finding of a negative association between debt and growth with an unambiguous call for austerity.
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Debt, Growth and the Austerity Debate - NYTimes.com

5/1/13 9:28 PM

We agree that growth is an elusive goal at times of high debt. We know that cutting spending and raising taxes is tough in a slow-growth economy with persistent unemployment. Austerity seldom works without structural reforms for example, changes in taxes, regulations and labor market policies and if poorly designed, can disproportionately hit the poor and middle class. Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists. In some cases, we have favored more radical proposals, including debt restructuring (a polite term for partial default) of public and private debts. Such restructurings helped deal with the debt buildup during World War I and the Depression. We have long favored write-downs of sovereign debt and senior bank debt in the European periphery (Greece, Portugal, Ireland, Spain) to unlock growth. In the United States, we support reducing mortgage principal on homes that are underwater (where the mortgage is higher than the value of the home). We have also written about plausible solutions that involve moderately higher inflation and financial repression pushing down inflation-adjusted interest rates, which effectively amounts to a tax on bondholders. This strategy contributed to the significant debt reductions that followed World War II. In short: many countries around the world have extraordinarily high public debts by historical standards, especially when medical and old-age support programs are taken into account. Resolving these debt burdens usually involves a transfer, often painful, from savers to borrowers. This time is no different, and the latest academic kerfuffle should not divert our attention from that fact.
Carmen M. Reinhart is a professor of the international financial system, and Kenneth S. Rogoff is a professor of public policy and economics, both at Harvard.

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Reinhart and Rogoff - Responding to Our Critics - NYTimes.com

5/1/13 9:20 PM

April 25, 2013

Reinhart and Rogoff: Responding to Our Critics

By CARMEN M. REINHART and KENNETH S. ROGOFF

CAMBRIDGE, Mass. LAST week, we were sent a sharply worded paper by three researchers from the University of Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in our article Growth in a Time of Debt, published in May 2010 in the Papers and Proceedings of the American Economic Review. In an Op-Ed essay for The New York Times, we have tried to defend our research and refute the distorted policy positions that have been attributed to us. In this appendix, we address the technical issues raised by our critics. These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet calculation error, but also accused us of two serious errors: selective exclusion of available data and unconventional weighting of summary statistics. We acknowledged the calculation error in an online statement posted the night we received the article, but we adamantly deny the other accusations. They neglected to report that we included both median and average estimates for growth, at various levels of debt in relation to economic output, going back to 1800. Our paper gave significant weight to the median estimates, precisely because they reduce the problem posed by data outliers, a constant source of concern when doing archival research that reaches far back into economic history spanning several periods of war and economic crises. When you look at our median estimates, they are actually quite similar to those of the University of Massachusetts researchers. (See the attached table.) Moreover, our critics omitted mention of our paper Public Debt Overhangs: AdvancedEconomy Episodes Since 1800, with Vincent R. Reinhart, published last summer, in The Journal of Economic Perspectives. That paper, which is more thorough than the 2010 paper under attack, gives an average estimate for growth when a countrys debt-to-G.D.P. ratio exceeds 90 percent of 2.3 percent compared to our critics figure of 2.2 percent. (Also see the comparisons posted by the blogger known as F. F. Wiley, including his chart, a copy of which accompanies this essay.)

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Reinhart and Rogoff - Responding to Our Critics - NYTimes.com

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Despite the very small actual differences between our critics results and ours, some commenters have trumpeted the new paper as a fundamental reassessment of the literature on debt and growth. Our critics have done little to argue otherwise; Mr. Pollin and Mr. Ash made the same claim in an April 17 essay in The Financial Times, where they also ignore our strong exception to the claim by Mr. Herndon, Mr. Ash and Mr. Pollin that we use a nonconventional weighting procedure. It is the accusation that our weighting procedure is nonconventional that is itself nonconventional. A leading expert in time series econometrics, James D. Hamilton of the University of California, San Diego, wrote (without consulting us) that to suggest that there is some deep flaw in the method used by RR or obvious advantage to the alternative favored by HAP is in my opinion quite unjustified. (He was using the initials for the last names of the economists involved in this matter.) Above all, our work hardly amounts to the whole literature on the relationship between debt and growth, which has grown rapidly even since our 2010 paper was published. A number of careful empirical studies have found broadly similar results to ours. But this is not the definitive word, as a smaller number of just as scholarly papers have not found a robust relationship between debt and growth. (Our paper in The Journal of Economic Perspectives included a review of that literature.) Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: Much of the empirical work on debt overhangs seeks to identify the overhang threshold beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year. This view generally reflects the state of the art in economic research, and the I.M.F. goes on to give many more subtleties. We have never complained as the body of work we helped to build has evolved instead, we have tried to learn from it. In contrast, our critics have politicized the issue, noting the citation of our research by Representative Paul D. Ryan of Wisconsin, the Republican vice-presidential nominee last year. Our critics seem to suggest that they can ignore everything else we have done because we are somehow going around placing great emphasis on one outlier estimate for growth. This is wrong. We have never used anything but the conservative median estimate in our public discussions, where we stated that the difference between growth associated with debt under 90 percent of G.D.P. and debt over 90 percent of G.D.P. is about 1 percentage point. See, for
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Reinhart and Rogoff - Responding to Our Critics - NYTimes.com

5/1/13 9:20 PM

example, a Bloomberg Businessweek article from July 2011 that has been cited as evidence that we are fiscal hawks. In that article, we cite only the median. Some have claimed that where we have really done damage is not in our public statements, but in what we say behind closed doors to policy makers. Some of those discussions have indeed leaked out over time, but they consistently show that our focus has been the median estimate. We might add that when we give public opinions and especially when we give policy advice, we base our ideas on our entire experience and knowledge of the literature, never just on our own work. We are glad the debate has sparked a huge interest in the whole topic, and hope research will now evolve even more quickly. We have shared our data with hundreds of researchers and since 2011 have posted the difficult-to-reconstruct historical debt-to-G.D.P. ratios online in thoroughly documented spreadsheets. The project of posting our data set relating to financial crises is a daunting task. It was the basis for our 2009 book, This Time Is Different, which was well received throughout the economics profession. We took great pains to provide the data in as accessible form as possible, including especially meticulous source documentation in the spreadsheets, far more than one sees normally posted with journal papers. So we are simply stunned when bloggers and irresponsible commentators say we have not shared our debt data. Open access to our data has been central to our whole project. As for the accusations of selective omission of data, there is little appreciation that this is archival research, involving constant judgments at every step. The New Zealand data we used was part of the problem that Herndon and his colleagues allude to biasing the results in favor of lower growth at higher levels of debt. We have since incorporated the correct data in our Journal of Economic Perspectives paper. Oddly, Herndon and his colleagues do not mention another data omission. This one was intentional on our part. Back in 2010, we were still sorting inconsistencies in Spanish G.D.P. data from the 1960s from three different sources. Our primary source for real G.D.P. growth was the work of the economic historian Angus Madison. But we also checked his data and, where inconsistencies appeared, refrained from using it. Other sources, including the I.M.F. and Spains monumental and scholarly historical statistics, had very different numbers. In our 2010 paper, we omitted Spain for the 1960s entirely. Had we included these observations, it would have strengthened our results, since Spain had very low public debt in the 1960s (under 30 percent of G.D.P.), and yet enjoyed very fast average G.D.P. growth (over 6 percent) over that period. We later reconciled this problem for our 2012 paper. This is just an example of what our
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archival research involves; it is not simply a matter of filling in cells on an Excel spreadsheet from sanitized, easy-to-use databases. We conclude with a few thoughts to supplement our broader discussion of the issues in our OpEd piece. First, we reiterate that the frontier question for research is the issue of causality. Clearly, recessions can cause higher debt, and in some extreme cases drive debt to over 90 percent, though such extreme jumps are rare outside of a financial crisis. We ourselves, in our 2009 book, showed that for postwar systemic financial crises, the average rise in the debt-toG.D.P. ratio after three years is 86 percent. But in our Journal of Economic Perspectives paper, we show that the duration of high-debt episodes (debt over 90 percent of G.D.P.) is very long indeed. The paper contains a case-by-case description of each debt overhang episode in advanced economies since 1800. As we note in our essay for The Times, the long duration of the overhangs, averaging 23 years, makes it hard to argue that they are simply the result of recessions driving up debt. We also note in that article that roughly half of all debt overhang episodes are associated with elevated real interest rates, suggesting the kind of vicious feedback loop between debt and growth that the periphery countries of the euro zone are currently suffering. In our view, the only way to break this feedback loop is to have dramatic write-downs of debt. We also note that a little under half of all cases do not involve higher real interest rates, such as the recent Japanese experience. Our Op-Ed essay gives reasons debt might still matter, including the way in which it crowds out fiscal space and limits the economys capacity to respond to shocks. But the root of the problem is still probably the fact that as debt rises, so too does the risk that a turn in interest rates might suddenly take the country from a seemingly safe debt situation to an unsustainable one. The economic literature is replete with examples of this, and many forecasts suggest long-term interest rates will rise significantly over the next decade. The basic problem for fiscal policy is that interest rates can turn very quickly but debt ratios cannot. So, most countries sensibly exercise some prudence as debt rises. Perhaps they are overly cautious. But the fact that debt levels over 90 percent of G.D.P. are rare (roughly 8 percent of postwar observation in advanced economies) and debt levels over 120 percent of G.D.P. are very rare. It is true that Japan has been an outlier since the 1990s, with gross public debt to G.D.P. exceeding 230 percent. But this ignores the fact that Japan, unlike the United States, is a creditor nation, holding massive dollar reserves that somewhat offset its debt. Until recently, it has always been running a current surplus with the rest of the world while the United States needs to borrow. Some have also used the example of Britain in the 18th century, when gross debt also exceeded 200 percent of G.D.P. Indeed, we include this and any other episode lasting longer than five years for which the data is available.

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The graduate students now poring over debt data should consider using the five-year filter used in our 2012 paper. This does not turn out to exclude all that many debt overhang experiences, but it does filter out a few associated with short recessions and postwar remobilizations. The big question today is not how economies do with high debt after a war, but how to handle high debts in peacetime. After a war, when physical capital is destroyed, but human capital remains, it is often possible to rebuild faster. There are also many efficiency benefits from releasing wartime controls and bringing manpower to productive use. But the first few years of such experiences, in any event, might not necessarily capture the problem that one is interested in, of todays peacetime deficits. Again, in our 2012 paper, we explore many reasons debt overhang might matter for growth, at least in theory. But much more needs to be understood. We again turn readers to our Op-Ed essay to understand ideas for bringing debt down. To reiterate, there are four solutions: slow growth and austerity for a very long time, elevated inflation, financial repression and debt restructuring. We have long emphasized the need to use the whole tool kit creatively in the aftermath of a once-in-75-year financial crisis. One of us has widely discussed using financial repression as a means of dealing high debt. Even at the outset of the crisis, one of us advocated mildly high inflation. A Project Syndicate column in December 2008 advocated moderately elevated inflation as means of getting the economy moving again, in part by taking some edge off public and private debts. Bill Clintons 2011 book Right to Work cites our proposals to write down subprime mortgage debt on a large scale. Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership. Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work. Finally, we view ourselves as scholars, though obviously given the prominence of book, and the extraordinary circumstances of the financial crisis, politicians will of course try to use our results to advance their cause. We have never advised Mr. Ryan, nor have we worked for President Obama, whose Council of Economic Advisers drew heavily on our work in a chapter of the 2012 Economic Report of the President, recreating and extending the results. In the campaign, we received great heat from the right for allowing our work to be used by others as a rationalization for the countrys slow recovery from the financial crisis. Now we are being attacked by the left primarily by those who have a view that the risks of higher public debt should not be part of the policy conversation. Above all, we resent the attempt to impugn

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our academic integrity. Doing archival research involves making constant judgments and yes, on occasion, mistakes. Learning from them is how science advances. We hope that we and others can learn from ours.

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Published: April 25, 2013

Comparing the Two Analyses

A comparison of the analyses of the association between debt and growth by Reinhart-Rogoff and Herndon-Ash-Pollin. Related Article
AVERAGE G.D.P. GROWTH:

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Herndon-Ash-Pollin 2013 arithmetic averages A drop of 1 percentage point

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4.2% 3.1 3.2

1. THOMAS L. FRIEDMAN: Its a 401(k) World 2. The Great Divide: No Rich Child Left Behind 3. Opinion: Diagnosing the Wrong Deficit

3.0 Reinhart-Rogoff 2010 preferred results (medians)

2.9

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4. Op-Docs: Lost Every Day 5. DAVID BROOKS: Engaged or Detached? 6. Draft: The Power of 'I Don't Know'

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7. Op-Ed Contributor: Clothed in Misery 8. MAUREEN DOWD: Bottoms Up, Lame Duck 9. Letter: Invitation to a Dialogue: The Art of Teaching

A drop of 1.3 percentage points

0
RATIO OF GOVERNMENT DEBT TO G.D.P.:

10. PAUL KRUGMAN: The Story of Our Time

Below 30%

30 to 60%

60 to 90%

Above 90%

Go to Complete List

The Data
19452009 RATIO OF DEBT TO G.D.P.

Reinhart-Rogoff (2010)
MEAN MEDIAN (CHARTED ABOVE)

Herndon-Ash-Pollin (2013)
MEAN (ABOVE) MEDIAN

Below 30% 30 to 60% 60 to 90% Above 90%

18002009 RATIO OF DEBT TO G.D.P.

4.1% 2.8 2.8 0.1

4.2% 3.0 2.9 1.6

4.2% 3.1 3.2 2.2

n.a. n.a. n.a. n.a.

Reinhart-Rogoff (2010, Table 1)

MEAN MEDIAN (CHARTED ABOVE)

Below 30% 30 to 60% 60 to 90% Above 90%

18002011 RATIO OF DEBT TO G.D.P.

3.7 3.0 3.4 1.7

3.9 3.1 2.8 1.9

Reinhart-Reinhart-Rogoff (2012)
MEAN

Below 90% Above 90%

3.5 2.3

By THE NEW YORK TIMES Carmen M. Reinhart and Kenneth S. Rogoff, Growth in a Time of Debt, January 18, 2010; Thomas Herndon, Michael Ash and Robert Pollin, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff, April

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2013; Cyniconomics
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