Two years ago the Harvard economists Carmen Reinhart and Kenneth Rogoff published their best-selling book This Time is Different which purported to show that one natioanl debt exceeds 90% of GDP, economic debt declines rapidly. It was seized on by Right-wing governments, media and academic pundits generally to justify a policy of extreme cutbacks in public spending in order to keep debt below the watershed level of 90% at all costs.

The theory, according to the Right’s mantra, was that high debt levels can crowd out economic activity and entrepreneurial dynamism, and thus hamper growth. Though it profoundly satisfied policy-makers who believe it counter-productive that governments should spend money in a recession and that a pro-cyclical austerity is more plausible than a Keynesian response, it turns out that the Reinhart-Rogoff thesis is quite wrong, first about the threshold and second about causality. Continue reading →