I think it's reasonable to assume that this is a response mainly to Paul Krugman (and if he responds, I'll add an update). In addition to the points Krugman has made, what I don't like about the analysis is that it only looks at the risk of adding to the deficit, it doesn't compare the risk posed by higher debt to the risk of doing nothing (or worse, contracting the deficit before the economy has recovered sufficiently).
For example, suppose that increasing the deficit means a 10% chance of growth being lower in the future by, say, .5% (the degree to which this actually happens is one of the controversial points). Then, in isolation, it looks like increasing the deficit is risky for growth. But suppose also that failing to pursue a more aggressive policy, i.e. more deficit spending, to reduce long-term unemployment (to name just one possibility) risks creating a permanent unemployment problem and that, in turn, risks lower growth. Suppose also that the there is a 20% risk of a .5% reduction in growth if nothing is done to combat the unemployment problem. The choice, then, is a 10% chance of lower growth with more deficit spending (again, the degree to which this actually happens is part of the controversy), and a 20% chance of lower growth if no further help is provided through an increase in deficit spending (and the odds would be even higher if austerity -- deficit reduction -- is pursued instead of holding the deficit at its current level). By only presenting the risks on one side of the decision that policymakers must make, the analysis leaves a distorted impression of the options. [Update: Paul Krugman responds, "Reinhart And Rogoff Are Confusing Me."]:
Debt and growth revisited, by Carmen M. Reinhart and Kenneth Rogoff, Vox EU: Economics has been under fire since the recent crisis for enshrining abstract models that offer little connection to the real world. In “Growth in a Time of Debt,” our data-intensive approach aims at providing stylized facts, well beyond selective anecdotal evidence, on the contemporaneous link between debt, growth, and inflation at a time in which the world wealthiest economies are confronting a peacetime surge in public debt not seen since the Great Depression of 1930s, and indeed virtually never in peacetime. As Paul Krugman (2009) observed, “they’ll (the economists) have to do their best to incorporate the realities of finance into macroeconomics.” One might add as a corollary, however, that such discipline is especially needed when those realities are inconvenient to strongly-held opinions.
And you don’t have to look far these days to find such strong opinions about the fork-in-the-road facing advanced economies when it comes to debt. There is no shortage of recommendations for either path, see for example see the Vox columns by Calvo 2010, Corsetti 2010, and Giavazzi 2010 last month.
In a recent paper, we studied economic growth and inflation at different levels of government and external debt (Reinhart and Rogoff 2010a). The public discussion of our empirical strategy and results has been somewhat muddled. Here, we attempt to clarify matters, particularly with respect to sample coverage (our evidence encompasses 44 countries over two centuries – not just the US), debt-growth causality (our book emphasises the bi-directional nature of the relationship), as well as nonlinearities in the debt-growth connection and thresholds evident in the data. These are fundamental points that seem to have been lost in some of the commentary.
In addition to clarifying the earlier results, this column enriches our original analysis by providing further discussion of the high debt (over 90% of GDP) episodes and their incidence. Some of the implications of our analysis, including for the US, are taken up in the final section. ... [...continue reading...]