The Stupidest Fact In All Of Economics

It just won't die: For some reason, people keep arguing that when government debt hits 90% of a country's GDP, it causes growth to slow.

We criticized this idea a few weeks ago when we pronounced Carmen Reinhart and Ken Rogoff the most dangerous economists in the world, since it was their work on the history of sovereign debt that produced this 90% factoid.

You see, while there is some logic to the idea that when a country's economy hits the skids its government debt shoots up (as governments engage in counter-cyclical spending), people have run with this and started arguing the inverse, that that level of debt in-tern causes growth to slow.

The latest to take up the cause is CNBC's John Carney, who found a new paper from the economists Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli (.pdf) that was presented at Jackson Hole on the impact of debt on growth. The paper does hit on the same ideas as Reinhart and Rogoff regarding the connection between high debt loads and slow growth.

According to Carney: "[The paper] badly undermines the Keynesian case—made by the like of Paul Krugman—for having government spending and borrowing increase to ameliorate the downturn. It implies that more spending—at least when financed by debt—will lead to lower growth rather than higher growth."

But we went and read the paper, and actually it's very underwhelming, and not at all an indictment of pro-stimulus papers (let alone "badly undermining").

First of all, the authors specifically weren't interested in crisis/deleveraging economies. They say this outright in the paper: (more)