CNBC host Rick Santelli discussed the heavily publicized error made by Harvard economists Carmen Reinhart and Kenneth Rogoff in their research paper Monday on "The Santelli Exchange."
Critics are using the calculation error to distort correlations between public debt and growth rates while discounting public policy that advocates spending cuts, Santelli said:
RICK SANTELLI: [...] You know, I really find it very important that we handicap how we're looking towards the ECB meeting. Our own Fed meeting, I don't really believe there's much doubt. I think -- it seems to me ever since the Reinhart Rogoff paper was dissed. And believe me there were obviously some issues there. But I do think it's been a stellar drop from grace as to what debt may mean and the notion of austerity being very much not very helpful. I will continue to say that I think that the generalized theme of that research paper is, is that whatever your growth rate is, especially when you look at it over a 5- 10-15-20-year horizon, if you have higher debt you underperform whatever that benchmark is. Pure and simple. We can argue about sampling, countries that are tiny and some of the errors that were made. But there seems to be very little doubt the more debt you have you're going to underperform. It's just a matter of how much. [...]
Previously, Reinhart and Rogoff's research indicated when public debt reaches of 90 percent of GDP, the average economic growth rate for advanced economies is -0.1 percent.
Revised estimates put the average growth rate for countries with debt over 90 percent of GDP at 2.2 percent.
As Andrew Ferguson of The Weekly Standard points out, the upward shift to 2.2 percent still evidences a negative correlation between debt and growth:
Countries with up to 30 percent debt-to-GDP ratio, according to [Herndon Ash and Pollin (HAP) revisions to Rogoff and Reinhart], average 4.2 percent growth; growth falls to 3.1 percent at a 60 percent ratio. Growth increases to 3.2 percent as the ratio reaches 90 percent. After 90 percent, growth averages 2.2 percent.
In other words, by the time a debt ratio rises above 90 percent of GDP, growth will be cut roughly in half—according to HAP’s own calculations. High debt-GDP ratios, once they take hold in a country, tend to last for 15 years or more. An annual loss of 2 percentage points in growth over such a sustained period really starts to add up: A country will be significantly poorer than if it had kept debt under control.
The United States currently has 2.5 percent GDP and a debt to GDP ratio of 101.6 percent.