The economics blogosphere is buzzing. A graduate student found an Excel error in Harvard economists Carmen Reinhart and Kenneth Rogoff's calculations on the relationship between debt and GDP, sparking off a reevaluation of their work. Reinhart-Rogoff had argued previously that when public (government) debt-to-GDP reaches a certain threshold (90 percent), GDP growth is much slower (-0.1 percent). Factoring in the Excel error among other revisions, it appears that growth is not so slow after surpassing said threshold (2.2 percent). This is a hard blow to "Austerians," or those in favor of cutting deficits by slashing spending and raising taxes. Policymakers, including Republican vice presidential candidate Paul Ryan, had seized on the original Reinhart-Rogoff research to support reducing the size of the federal government.
Justin Wolfers, an economics professor at the University of Michigan and author of the above tweet, has written a nice recap of the Reinhart-Rogoff debacle over at Bloomberg View. In summary, the relationship between public debt and GDP growth does matter, but the public discourse has largely focused on the wrong parts of the relationship. Pundits and policymakers love to raise the alarm about a 90% threshold because it catches people's attention. However, it is nonetheless an oversimplification of a complex issue, and as Professor Wolfers suggests, Americans should not care only about the quantity of the government's debt. The quality of public services, projects, and investments the governments spends its debt on is just as, if not, more important than how much it borrows.
America is in the middle of an underwhelming recovery. Can Congress do more? The short answer is yes. Currently, the federal government can borrow long-term at exceptionally low rates. In real terms, the Treasury Department recently issued thirty year debt yielding around 0.5%. Allow me to repeat: The federal governmentwill pay 0.5% adjusted real interest on thirty year debt! What should this borrowing be spent on? Well, hopefully Congress would get serious and spend wisely to help alleviate the problems in the labor market. The first priority should be getting the unemployed back to work. Much-needed infrastructure projects and jobs training programs are a good place to start.
The Can Kicks Back is focused on the best way to manage current and future public debt levels in the United States. In debating how federal spending should evolve going forward, the campaign has at times been labeled as a pro-austerity group (I certainly have faced this criticism when I mention that I blog for the campaign). I object. The Can Kicks Back is focused on the future, both the short- and the long-term. Each time horizon has a different set of problems and demands a different set of solutions. The United States faces a struggling labor market (unemployment rate for millennials? 7.4%), and the long-term trajectory of entitlement spending is unsustainable. The solution to each issue is not the same. Congress should initiate quality fiscal stimulus to help America's unemployed, to improve the country's infrastructure, to invest in research & development, AND work to structurally reform the tax code, Social Security, and Medicare. Thinking about the short- and long-term? That is just good fiscal policy.