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Who’s Afraid of the Big Bad Debt?

CAMBRIDGE – It has been a while since a debate among academic economists attracted so much interest from the mainstream press as has the row between Carmen Reinhart and Kenneth Rogoff, on one side, and Paul Krugman, on the other. In fact, it has even become fodder for television comedy shows.

At issue is an influential 2010 paper by Rogoff and Reinhart that purports to show that high levels of public debt are associated with lower long-term economic growth. A new paper by Thomas Herndon, a graduate student at the University of Massachusetts at Amherst, and two of his professors, Michael Ash and Robert Pollin, questioned this finding, and Krugman made their work famous.

Herndon, Ash, and Pollin argue that the results obtained by Reinhart and Rogoff are based on coding errors and questionable methodological choices. But, after all their quibbles, their paper weakens but does not refute the Reinhart/Rogoff paper’s main result. So why all the fuss?

The debate is considered important because it is supposed to have implications for the choice between cutting the deficit and stimulating the economy now. But this is just not so. Instead, the paper needs to be understood in the context of the debate between Keynesians and (as Krugman calls them) “Austerians” – those who propose fiscal austerity to stem spiraling government debt.