Bloomberg News

Reinhart, Rogoff Saying Rising Debts Pose Risk to U.S., Europe

July 14, 2011

July 14 (Bloomberg) -- Rising government debts pose a significant risk to economic growth and financial stability in the U.S. and Europe, economists Carmen Reinhart and Kenneth Rogoff wrote in a column for Bloomberg View.

Nations historically have run into trouble when public debt exceeds 90 percent of gross domestic product, Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington, and Rogoff, a Harvard University professor, said. And by their reckoning, the U.S. and some European nations have passed that threshold.

“While we expect to see more than one member of the Organization for Economic Cooperation and Development default or restructure their debt before the European crisis is resolved, that isn’t the greatest threat to most advanced economies,” they wrote. “The biggest risk is that debt will accumulate until the overhang weighs on growth.”

The analysis adds intellectual backing to the case for a larger deficit-reduction package in talks between the White House and Congressional leaders on raising the $14.3 trillion national debt limit. Moody’s Investors Service raised the pressure on lawmakers to increase the ceiling by placing the nation’s credit rating under review for a downgrade yesterday.

Talks initially focused on reducing federal deficits by $4 trillion over 10 to 12 years. Republican congressional leaders have scaled back their goal to about $2 trillion, and the party’s Senate leader, Mitch McConnell of Kentucky, on July 12 offered a “last-choice” proposal to allow a debt-ceiling increase without any deficit-reduction measures.

Differing Means

President Barack Obama and Republican leaders have both focused on reducing the deficit and the growth of government debt, while differing over how to achieve that goal. Republicans oppose any tax increases. Democrats oppose cuts in entitlement benefits such as Social Security and the Medicare and Medicaid health programs, unless there is more tax revenue.

Sixty-one percent of Americans would not be willing to pay more in taxes to reduce the deficit, according to a Bloomberg National Poll conducted in June. Sixty percent believe it is more important to keep Social Security and Medicare benefits than to reduce the deficit, according to a survey conducted the same month by the Pew Research Center for the People & the Press.

Federal Reserve Chairman Ben S. Bernanke told Congress yesterday that high U.S. budget deficits, if not curbed, could slow the economy and prompt an increase in interest rates. At the same time, he said Congress needs to be a “little bit cautious” about “sharp cuts” in federal spending in the near term because they could hurt the recovery.

‘Prominent’ Intellectuals

Reinhart and Rogoff took issue with “prominent public intellectuals” who play down the significance of the debt and argue that the U.S. should take advantage of low yields on Treasury securities to launch another big fiscal stimulus.

One such intellectual is Nobel laureate Paul Krugman, whom Reinhart and Rogoff don’t mention by name. Krugman, a Princeton University professor and a columnist for The New York Times, has castigated Obama and other policy makers for focusing on cutting the budget deficit and has called for increased government spending to help bring down the 9.2 percent unemployment rate.

“It would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an ‘all clear’ signal for a further explosion of debt,” the co-authors of the book “This Time is Different: Eight Centuries of Financial Folly,” said. “Market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly.”

The yield on the 10-year Treasury note stood at 2.88 percent late yesterday in New York, compared with an average 5.38 percent since the start of 1990.

Study of Crises

Reinhart and Rogoff said their study of financial crises shows that public obligations are often significantly larger than official figures suggest. Case in point: the debt of mortgage financing firms Fannie Mae and Freddie Mac, which was never officially guaranteed by the U.S. government until the financial crisis hit.

Based on their research on the experiences of 44 countries for up to 200 years, nations with public debt in excess of 90 percent of GDP suffer 1 percent lower median growth of their economies, the economists wrote.

History suggests “the need to be cautious about surrendering to ‘this time is different’ syndrome and decreeing that surging government debt isn’t as significant a problem in the present as it was in the past,” they added.

--With assistance from Mike Dorning in Washington. Editors: Christopher Wellisz, Kevin Costelloe

To contact the reporter on this story: Richard Miller in Washington at

To contact the editor responsible for this story: Chris Wellisz at

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