"It would be absurd to think that governments never have to worry about their level of indebtedness. The aim of our paper was much more narrowly focused. We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth."
Slightly longer tl;dr, from the article's abstract:
"Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower."
I think they were. Speaking as someone who is generally pro-austerity, I think R&R concluded that after 90% debt/GDP there was major drop-off in GDP growth. The corrections all but destroy this assertion. That's not to say that debt and GDP growth aren't inversely proportional/correlated -- just that there is no magic level that changes the relationship substantially.
Honestly, there are so many variables and dimensions in this system and so little data I'm not sure we should ever be drawing sweeping conclusions like this.
>I think they were. Speaking as someone who is generally pro-austerity, I think R&R concluded that after 90% debt/GDP there was major drop-off in GDP growth.
That doesn't mean they were asserting what the grad students claim, that the falloff in growth is unavoidable, which sounds like an extreme strawman.
R&R's defense strategy seems currently to pretend that they weren't claiming anything in particular by the paper originally: "hey man, I was just putting it out there. I didn't, like, mean anything by it."
But their own public pronouncements, and the way they responded to other's interpretations of the results, pretty much indicated that they though they'd found firm evidence that there was some big non-linearity at 90%.
I'm not claiming R/R are saints. I'm just objecting to ridiculous strawman implied by:
"We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth."
RR's claim is entirely statistical, so of course they're not going to claim that exceeding the ratio always ("invariably") leads to a major decline in growth.
RR's being wrong doesn't mean it's okay to insinuate they hold ridiculous positions that they really don't. That's just compounding public misconceptions.
The claim by R&R is that yearly GDP growth decreases abruptly (i.e. in an non-linear fashion) when debt exceeds 90% of its GDP. According to them, therefore, governments should have, in times of recession, debt reduction at the top of their economical agendas.
The response by Herndon doesn't insinuate that countries should disregard debt as a matter of concern. It doesn't even say that debt increase isn't correlated with GDP decrease. The main issue that the paper points at is that US and European governments have, based on this thesis, adopted drastic policies of austerity and budget cuts, when actually over history there isn't such a nonlinearity.
According to them, therefore, governments should have, in times of recession, debt reduction at the top of their economical agendas
I'm not sure this is right. Rogoff said "back in 2008-9, there was a reasonable chance, maybe 20% that we’d end up in another Great Depression. Spending a trillion dollars is nothing to knock that off the table." I didn't see any policy recommendations in the paper.
The main issue that the paper points at is that US and European governments have, based on this thesis, adopted drastic policies of austerity
_Maybe_ for the US, but the timing doesn't match for Europe. For the UK, the usual candidate for self-imposed austerity, Cameron was arguing for austerity before the paper became well-known.
"It would be absurd to think that governments never have to worry about their level of indebtedness. The aim of our paper was much more narrowly focused. We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth."