Over the past year-and-a-half, many prominent strategists have cited the research of Carmen Reinhart and Kenneth Rogoff in contending that the U.S. will be in big trouble if its debt-to-GDP ratio climbs past 90%. But Robert Huebscher, the founder of Advisor Perspectives, says they are misreading Reinhart and Rogoff’s research.
The problem, Huebscher says, is that those citing the 90% threshold have “ignored Reinhart’s and Rogoff’s own words of caution with respect to the special situation of the US, and they failed to consider the limits inherent in Reinhart and Rogoff’s dataset of countries with high debt levels. I spoke with Rogoff last week, and he explained that one of those limitations is the rarity of such high-debt events and the extreme rarity of examples of countries exceeding 120% of debt-to-GDP.”
Last summer Huebscher notes, Reinhart and Rogoff wrote an article for Bloomberg in which they stressed that debt can be a big problem for countries — but they downplayed the rigidity of the 90% threshold. “We aren’t suggesting there is a bright red line at 90 percent; our results don’t imply that 89 percent is a safe debt level, or that 91 percent is necessarily catastrophic,” they wrote. “Anyone familiar with doing empirical research understands that vulnerability to crises and anemic growth seldom depends on a single factor such as public debt.” They added that, “However, our study of crises shows that public obligations are often hidden and significantly larger than official figures suggest.”
Rogoff and Reinhart also distinguish between different types of debt, Huebscher says. Some types of debt, like infrastructure rebuilding, support growth, he says, while other types, like transfer payments from federal to state governments, do not. “Don’t believe those who say there are no good alternatives or that the US faces a series of bad choices that involve painful delevering,” Huebscher writes. “There are good options, but they are not easy to implement. We need to heed the lessons of the Industrial Revolution and the Great Depression, and accept that our government must embark on a series of initiatives large enough in scope to restore the country to full employment.”