Published in The Tennessean, Sunday, April 28, 2013 and at FORBES with archives.
by Richard J. Grant
In scientific controversies, as in political contests, the people
most ignored are those who would prefer to vote for “none of the above.”
In political contests, we must often take sides between the two
remaining “most electable” candidates in order to minimize the damage
that will ensue. But in scientific controversies we are not so
That is why this column never endorsed the 2010 study
by economists Carmen Reinhart and Kenneth Rogoff that purported to find
a sudden increase in “debt intolerance” in countries whose national
debt levels exceeded 90 percent of GDP. The problem was not with the
concept of debt intolerance, but rather with the portrayal of the 90
percent level as some sort of natural threshold beyond which economic
growth rates would be severely curtailed.
Even before reading their article, it could be guessed (correctly, as
it turned out) that the 90 percent threshold was more an artifact of
how the data were selected and grouped rather than anything resembling a
natural law. At the best of times, statistical studies of economic
phenomena are exercises in economic history, not economic science. At
the worst of times, working with whatever data happen to be available,
they resemble a drunk looking for his keys under the lamppost. The
science resides in the theory that is necessary to interpret the data.
Last week, researchers who were given access to the original data and
spreadsheet used by Reinhart and Rogoff announced they had discovered
calculation errors. After correction, the 90 percent threshold had
disappeared. There was still a negative correlation between the size of
the national debt and GDP growth, but there was no implied causal
relationship or sudden change at 90 percent.
Unfortunately, all of this had played out in a political environment
in which the U.S. and some state governments were running record
deficits, partly in response to the recent recession. The debate over
deficits grew in shrillness and crowded out discussion of the deeper
problems, such as excessive government spending, overregulation, and the abuse of the powers of the Federal Reserve System.
During the past three years, the study’s conclusions were used to
overstate the case for deficit reduction. With the revelation of the
spreadsheet errors, some supporters of big government were giddily
proclaiming victory as if they had not already been discredited before
Reinhart and Rogoff entered the scene.
Those who need the assurance of statistical studies would be better served by the Rahn Curve (named after economist Richard Rahn),
which shows a long-term negative relationship between the size of
government expenditures as a percentage of GDP and economic growth
rates. In other words, the bigger the role of government in the economy,
the lower will be long-term economic growth rates.
The original theory underlying the Rahn Curve assumed that as the
size of government increased from zero, supplying law and order and some
basic services, economic growth rates would increase until government
reached some optimal size. Government expenditures are not the only
variable, so even if we had more examples of small government, we would
still not be able to specify an optimal size of government expenditures,
where the Rahn Curve peaks.
But what we can be sure of is that the peak of the Rahn Curve is much
closer to zero than to where we are now. Instead of obsessing over debt
and deficits, we should instead focus on the primary factor of
government interference in the economy. If we constrain government
spending, reduce the burden of regulation, and assure the value of the dollar, the national debt will cease to be a threat.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb University
and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly
on Sundays in the print and online versions of The Tennessean. He is also a regular FORBES contributor. E-mail messages received at:
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© Richard J Grant 2013