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Reinhart and Rogoff: Debt and growth revisited


DP Veteran
Oct 17, 2007
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New York
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At the VoxEU blog site, Professors Reinhart and Rogoff, authors of This Time is Different (Princeton University Press, 2009) have written a piece that provides a nice summary of an important component of the findings they exhaustively lay out in their book.

In part, they write:

...the relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP.1 Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. The threshold for public debt is similar in advanced and emerging economies and applies for both the post World War II period and as far back as the data permit (often well into the 1800s)...

One need look no further than the stubbornly high unemployment rates in the US and other advanced economies to be convinced how important it is to develop a better understanding of the growth prospects for the decade ahead. We have presented evidence – in a multi-country sample spanning about two centuries – suggesting that high levels of debt dampen growth. One can argue that the US can tolerate higher levels of debt than other countries without having its solvency called into question. That is probably so.10 (see Reinhart and Reinhart 2007). We have shown in our earlier work that a country’s credit history plays a prominent role in determining what levels of debt it can sustain without landing on a sovereign debt crisis. More to the point of this paper, however, we have no comparable evidence yet to suggest that the consequences of higher debt levels for growth will be different for the US than for other advanced economies. It is an issue yet to be explored.

IMO, Professors Reinhart and Rogoff are dead-on in their assertion that they have seen "no comparable evidence" to date "to suggest that the consequences of higher debt levels for growth will be different for the US than for other advanced economies." In fact, I would argue that there is some evidence debunks the idea that the U.S. is somehow unique or immune to the consequences of debt-related drag on economic growth.

Since the 1950s, there appears to be an inverse relationship between how fast the broadest measure of debt (domestic non-financial debt) grows relative to nominal GDP and the overall increase in real GDP.

The first set of figures shows the change in domestic non-financial debt, which includes public debt (federal, state, and local), non-financial corporate debt, non-financial nonfarm noncorporate debt, farm debt, and household debt relative to nominal GDP. A figure of $1.50 means that the nation's domestic non-financial debt increased $1.50 for every $1.00 increase in nominal GDP.

Change in domestic non-financial debt vs. the change in nominal GDP:
1950s: $1.38
1960s: $1.36
1970s: $1.89
1980s: $2.03
1990s: $1.77
2000-08: $3.50

The second set of figures shows the average annual real GDP change during the same timeframes cited in the above set.

Annual real GDP growth:
1950s: +3.5%
1960s: +4.2%
1970s: +3.2%
1980s: +3.2%
1990s: +3.4%
2000-08: +2.1%

The figures speak for themselves. I don't believe it is mere coincidence that the overall 2000-2008 annualized real GDP growth was noticeably more sluggish on account of the U.S. debt binge that was underway during that timeframe. Households made the biggest contribution to that increase in debt, accounting for nearly 45% of that increase. The explosion in mortgage debt was the principal driver of the household debt binge, accounting for about 87% of the increase in household debt.


DP Veteran
Jun 3, 2009
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Very Conservative
Of course. There's only so much capital to go around. There are consequences to too much debt, I don't know why you need such a study that makes so much intuitive sense.
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