We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future. We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work. But first let us consider the specific points raised by Herndon Ash and Pollin (HAP) in their comment that we were sent yesterday.They then summarize the issues affected and conclude;
So do where does this leave matters on debt and growth? Do Herndon et al. get dramatically different results on the relatively short post war sample they focus on? Not really. They, too, find lower growth associated with periods when debt is over 90% (they find 0-30 debt/GDP , 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; over 90, 2.2%. Put differently, growth at high debt levels is a little more than half of the growth rate at the lowest levels of debt. They ignore the fact that these results are close to what we get in our Table 1 of our AER paper they critique, and not far from the median results in Figure 2 despite its coding error. And they are not very different from what we report in our 2012 Journal of Economic Perspectives paper with Vincent Reinhart—where the average is 2.4% for high debt versus 3.5% for below 90%.Which matters because;
There is also the question of whether these growth effects can be economically large. Here it is very misleading to think of 1% growth differences without recognizing that the typical high debt episode lasts well over a decade (23 years on average in the full sample.)
It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small. If a country grows at 1% below trend for 23 years, output will be roughly 25% below trend at the end of the period, with massive cumulative effects.Hardly supporting the Business Insider characterization of, 'The statement isn't a full cave.' It's more like, 'Much ado about nothing'