Why the Argument for Austerity Took a Big Hit Yesterday

In the years following the financial crisis, America has been obsessed with debt. Hurting from the crisis, consumers and businesses have been busy paying off debt, while the federal government has ramped up its borrowing through a combination of stimulus spending and lower tax revenue. And of course all this new government debt — which has reached 73% of GDP and is expected to remain roughly at that level for the next decade — has many policy makers and citizens deeply concerned, to say the least. But exactly how concerned we ought to be over that debt level — and how radically we need to act to reduce it — remains hotly debated. Governments obviously need to be able to borrow, and nearly every government does so. But experts have reached no clear consensus over how much (relative to the size of its economy) a nation can safely borrow. That is, no consensus had begun to emerge until the appearance in 2010 of a paper, by economists Carmen Reinhart and Kenneth Rogoff, called “Growth in the Time of Debt,” which found that countries with higher debt levels tend to grow more slowly than those with little debt. For those who tend to see the rising debt load of the U.S. as a serious problem, these findings were just the evidence needed to prove that America had to cut back on spending, and fast. (MORE: When Will the Federal Debt Cause a Greece-Like Crisis in the U.S.?) Tim Fernholz at Quartz does a nice job summarizing just how influential this work has been in Washington and Europe. He points to a scene, from a recent book on the federal debt by Republican Senator Tom Coburn, in which a bipartisan group of senators meet with Reinhart and Rogoff, and are obviously in agreement with their conclusion that allowing total debt/GDP to grow beyond 90% would be very dangerous indeed. As Fernholz writes, “It’s hard to get bipartisan agreement on anything in the Senate, but you can see influential legislators from both parties were listening closely to the two

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