An MIT Non-Economist’s View of the Harvard-UMass Debt/GDP Ratio and the Economic Growth Debate

The real problem? Use of the Debt/GDP ratio Table of Contents
§ No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Topic Summary Introduction Important and Overlooked Property of a Straight line The linear Debt-GDP relation The GDP growth rate and the linear Debt-GDP law 2012 Debt-GDP relation for 30 leading economies GDP Growth ∆x/x versus Debt-GDP (y/x) ratio Brief Discussion and Conclusions Conclusions Reference list Appendix 1: Four types of straight lines and y/x ratios

Page No. 2 3 9 13 21 22 26 35 46 49 55

Debt, y [$, Trillions]

14 12 10 8 6 4 2 0 0

United States (2002-2012)











GDP, x [$, Trillions]

An Overlooked GDP-Debt Growth law
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§ 1. Summary
Within the context of the recent repudiation of the Reinhart-Rogoff findings (regarding the stifling effect of a high Debt-GDP ratio, exceeding 90%, on economic growth), it is important also to point out a much more fundamental problem with the general and widespread use of the Debt-GDP ratio in the discussion of economic performance. A review of the Debt and GDP data for several countries (for the years 2002-2012) reveals a simple and remarkably linear law, of the type y = hx + c between the GDP (x) and the Public Debt (y). Hence, GDP and Debt cannot be treated as independent quantities. The linear law means that the Debt/GDP ratio y/x = h + (c/x) can either increase or decrease as the GDP (x) increases, depending on the numerical values of h and c (which can be either positive or negative). The Debt-GDP data for 30 leading modern economies have been reviewed in this context. The examples of Australia, Brazil, Canada, China, Germany, Ireland, and Japan, and their performance during the period 2002-2012 (in the years before and after the US financial crisis of 2008, felt globally) are discussed here briefly to show that a high Debt-GDP ratio does NOT necessarily stifle economic growth. The post-2008 financial crisis data could not be analyzed by Reinhart-Rogoff. Finally, a new diagrammatic representation is suggested to assess the GDP growth relative to Debt growth, which also takes into account the significance of the linear law relating the GDP and the debt.

**************************************************** The Iceland election results, widely viewed as a vote against austerity, were announced after the publication of this article. This is discussed separately in Ref. [41] along with a discussion of the work function.
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§ 2. Introduction
In a seminal paper, entitled, “Growth in a time of Debt”, see Ref. [1], published in 2010, two Harvard economists, Reinhart and Rogoff (hereafter RR) tried to show that when the Debt/GDP ratio exceeds about 90%, the economic growth rate slows down significantly; see a small sample in Table A below. Table A: Effect of Debt/GDP on Real GDP Growth (Reinhart-Rogoff) Debt/GDP US UK France Italy 100(y/x) % (1790-2009) (1830-2009) (1880-2009) (1880-2009) Below 30% 4.0 2.5 4.9 5.4 30% to 60% 3.4 2.2 2.7 4.9 60% to 90% 3.3 2.1 2.8 1.9 Above 90% -1.8 1.8 2.3 0.7 Source: Table 1 of Reinhart-Rogoff, also Table 1 in Herndon’s April 22 discussion. Exactly similar data for 20 countries are summarized by Reinhart-Rogoff. The RR paper, it is believed, has greatly influenced economic policy and is now at the center of an intense worldwide debate after three UMass-Amherst economists, Herndon, Ash and Pollin (hereafter HAP) found a coding error in the original Microsoft Excel spreadsheet used by RR, see Ref. [2] and a recent discussion by Herndon, the lead author, in Ref. [3]. Critiques of RR, Refs. [3-8], maintain that the errors have undermined the basis of the claims made by RR. While the criticisms of RR, in the light of HAP, have focused on discussions of the errors and the implications of high Debt/GDP ratios for economic growth, I would, however, like to call attention here to a much more fundamental problem with the widespread use of y/x ratios in the analysis of economic, financial, and other business related data. This is a topic that I have discussed in a number of articles available on this website, see bibliography in Ref. [9], and also the recent discussion of Airline Quality Ratings, Refs. [10-14]. The RR paper relies on two important concepts: the ratio y/x = Debt/GDP and the economic, or GDP, growth rate. Essentially, the GDP, x, and the public debt, y, are considered to be independent quantities which can enter into the ratio y/x which can then be compared to GDP growth rate.
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The implications of this linear law. deepest in debt.102/x decreasing with increasing GDP.0 233.837 + 0.2 Portugal 0. The data for ten countries. Country Page | 4 . is discussed briefly in §3.5 120. [15]. reveals a remarkably simple and linear relation. see Ref.837x + 0.9 Germany 3.56 2.2 97. with r2 = 0.46 1.102.88 13.996 (see Refs.225 103.13 12. between the GDP x and the debt y.54 115. [3].4 168.76 2.5 101.2 2.26 81. see the global debt clock.5 Belgium 0. y 100 (y/x) (as quoted) ($.5 Greece 0. [17.18]) and the Debt/GDP ratio y/x = 0.514 0.7 108.huffingtonpost. may be found in Table B. however.8 France 2. we will consider the relation between the Debt/GDP ratio and GDP growth for several countries.4 USA 15.479 93.2 Japan 5.9 The Nominal GDP for 2011 (rather than Real GDP) is used here.99 80.html Compiled by 24/7 Wall Street.303 0. see Figure C. The GDP-Debt relations are presented in §4 and §5.1 Data source: http://www.257 107. trillions) UK 2.8 84. The Debt-GDP data for 30 countries is considered in § 6. trillions) ($. The linear law is again observed. Table B: Ten Countries Deepest in Debt Nominal GDP Government Debt/GDP Debt/GDP (2011). The x-y graph can be shown to be linear.6 Ireland 0. and the nonzero intercept c.1 Italy 2. which seems to have escaped the attention of economists to date.489 161. x. x Debt.4 81. Herndon’s baseball analogy.6 85.9 80. in §7.79 78. Finally. y = 0. Ref.A review of the readily available Debt-GDP data for several leading economies. at the website of The Economist.239 0. of the type y = hx + c. is also discussed in this context. see Figures A and B which consider the multi-year data for China and Germany.217 0.7 233.

Trillions] 1.0 5. y) pair to the origin (0. the Debt/GDP ratio y/x = h + (c/x) = 0. y) data indicates a decreasing slope between 2002 to 2007 and an acceleration to a higher fixed slope after the financial crisis of 2008.0 8. x [$.218/x).0 6.00 0.218 with a positive slope (h > 0) and a positive intercept (c > 0). The best-fit line through the data has the equation y = hx + c = 0. The limiting value of the ratio y/x = Debt/GDP ratio is the slope h. A more careful examination of the (x.20 0.0).0 3.40 0.20 China (2002-2012) Debt.60 0. the data can be described quite well by the linear law.40 1.124 + (0. The positive intercept c means that the Debt/GDP ratio will keep on decreasing as the GDP increases. The focus on the Debt/GDP (y/x) ratio creates the “perception” of China must be doing something very right with its fiscal policies.124x + 0.124x + 0. see the dashed lines joining the (x. The slope of the dashed line.0 2.0 y = hx + c = 0.0 10.983 Type II Behavior GDP. When the GDP increases by Page | 5 .0 4.0 1. Trillions] Figure A: The multi-year data for China (2002-2012) reveals a remarkably simple and linear law relating the GDP (x) and the Debt (y). y [$. whereas the reality is that the Chinese public debt has been increasing at a fixed rate h during the entire period under consideration (see also Figure B for Germany). overall. However.0 7.00 0.80 0.0 9.218 r2 = 0. or “rays” joining a point on the graph to the origin is equal to the ratio y/x. Hence.1.

00 y = hx + c = h(x – x0) = 0. x [$. the debt always increases by the same fixed amount ∆y = h∆x.(0.00 GDP. The best-fit line has the equation y = 0.843) r2 = 0. Trillions] 4.a fixed amount ∆x. or the heating curve for a body being heated at a fixed rate.979x – 0.00 4. Hence.00 2. statistically speaking. 5. This is what we learn in our elementary calculus courses. y [$. The negative intercept c means that the Debt/GDP ratio will Page | 6 .00 1.00 3.979 .00 0. However. Trillions] Figure B: The multi-year data for Germany (2002-2012) also reveals a linear law.00 Germany (2002-2012) 0. The rate of increase of debt y with respect to the GDP x is the slope of the graph.00 5. the Debt/GDP ratio y/x = h + (c/x) = 0.00 2. overall.00 1.825 with a positive slope (h > 0) and a negative intercept (c < 0). the data can be described quite well by the linear law. or the speed-time graph for a vehicle having a constant acceleration.825/x). A careful examination of the (x.00 Debt.863 Type I Behavior 3. y) data indicates a nearly constant slope for the period 2002 to 2007 and then tight clustering of the data following the crisis of 2008.979(x – 0.825 = 0. Other examples of the same type of behavior are the distance-time graph for a vehicle moving at a fixed speed.979x – 0. This rate is a constant.

102 r2 = 0. high GDP) fall outside the scale of this graph. This leads to the opposite perception of an economy burdened with debt. for ten countries deeply in debt. For the purposes of the present discussion. y) pair to the origin (0. between two consecutive periods of interest.00 0.00 2. 4. countries (GDP and debt under $5 trillion) are considered here to illustrate the linear relation. we will consider only the years 2002-2012.00 3.996 Multi-country (2011) 1.00 0. Trillions] 3. before and after the financial crisis in the US in 2008 whose effects Page | 7 .00 5. y [$. Trillions] Figure C: The multi-country. see the dashed lines joining the (x.00 2. the GDP growth rate is taken as ∆x/x.keep on increasing as the GDP increases.e.00 Debt.00 4. Refs. The data for Japan (high debt midrange GDP) and USA (high debt. i. x [$. the most recent period.00 1. also reveals a linear law. going back to some 200 years (for the US).00 GDP.836x + 0.00 y = hx + c = 0. [19-24]. Unlike the historical data considered by RR.. single year (2011) data. the percentage change in the denominator x (the GDP) of the Debt/GDP ratio.0). Only the low GDP. low debt.

Please note that I am not a professional economist. Indeed. determines its future position. The instantaneous speed of a vehicle. the large mass of historical data reviewed by RR is simply irrelevant to a discussion of the current global situation with high unemployment rates.academic reminder. the topic of the present article. All my professional life was spent in the R & D environment.not so trivial . I did take the basic economics courses and even had the honor of exchanging a few words with the Nobel Prize winning economists on MIT’s Economics department faculty. Since academic research has now taken center stage in one of the great national economic debates of our times. And so it is that. rather than its historical speed (the average speed since the trip began. If a straight line does NOT pass through the origin. as an R & D professional at the “old” General Motors Research Labs. The same considerations apply to the Debt and the GDP data if one is looking here for solutions to the current global economic crisis. in the US and worldwide. or its average speed in many tens or hundreds of trips in the past). I discovered.were felt globally. Page | 8 . an interesting mathematical property of ratios. such as the Debt/GDP ratio. quite accidentally. the title is just meant to be an attention grabber. I have Master’s and doctoral degrees in Materials Engineering from MIT. at leading US institutions and so I have spent a good part of my time analyzing empirical observations and developing simple mathematical models to explain the observations. in the summer of 1998. please allow me now to add here another . the ratio y/x is not a constant and can either increase or decrease as we move up or down the line to increasing or decreasing values of x.

i. Honda. using the baseball analogy. and for different time periods. with significantly lower values of the ratio HPV.. y/x. how is the team’s batting average determined? What “averaging” technique can be used to find the team’s BA? The same questions must be addressed when we consider the Debt/GDP ratio for different countries. the plants owned by the Japanese but which employed American labor. We cannot draw any performance related conclusions until we observe both players over nearly comparable number of At Bats. Ford and Chrysler. The second has a PERFECT batting average of y/x = 1/1 = 1. etc. the denominator x of the batting average ratio is not comparable. The ‘transplants. If these two players belong to the same team. stampings. Even one single missing part means a car/truck cannot be assembled. GM. the situation with these automotive plants was very similar to that discussed by Herndon in Ref. An Important but Overlooked Mathematical Property of a Straight line The historic UAW-GM strike of 1998 brought all of GM’s productions to a grinding halt. and Nissan. Because of the ripple effects of the strike. in GM assembly plants and other automotive plants producing engines. were significantly more efficient. and the two other US automakers.000. [3]. y) pairs denote the scores of two baseball players with x being the number of At Bats and y the number of Hits how do we compare two players. The ratio y/x has units of Hours per Vehicle (HPV). x. If the (x. not a single car or truck could be produced by the world’s largest automaker.200.§ 3. were considered to be horribly inefficient compared to their Japanese counterparts – Toyota. The number of At Bats.e. one having 100 At Bats and 20 Hits and the other player with just one At bat and one Hit? The first player has a “batting average” BA = y/x = 20/100 = 0. The ratio that I was then interested in was the labor productivity. Indeed. Here x is the number of vehicles produced and y the labor hours. Does this mean the second player is better than the first? The answer is a clear NO. Page | 9 .

in a recent article on the quality rating for US airlines. Can we still make the comparison using the y/x ratio? The baseball batting average analogy is very apt in this context. see Refs. if the straight Page | 10 .600 as the average for the two players. Hence. and using (0. The number of At Bats x is not even close. The automotive labor productivity problem that I was trying to analyze back in 1998 is exactly similar.200 + 1. The nonzero intercept c has some interesting consequences. Herndon has pointed out that Reinhart-Rogoff averaging is equivalent to simply taking the average of the two batting averages. The nonzero c means that the ratio y/x is not a constant. as discussed. We know instinctively that we cannot simply average the two averages when faced with the batting stats (100. the ratio y/x is NOT a constant and will either increase or decrease as x increases (or decreases) and we move up or down the line. for example. with whom I have discussed this. This is being called the “unconventional averaging” technique of RR. they are giving “equal weight” to both the y/x ratios. 20) and (1. can we take the average GDP growth (at each debt level) of the three countries here. as an “average” GDP growth in order to formulate far reaching economic policies? The problem that Herndon is calling attention to has to do with the “size” of the denominator x in the y/x ratios. With reference to the sample table on page 2. over the years. 1) for two players. The mathematical equation of such as straight line is y = hx + c. While I was trying to unravel the GM inefficiency puzzle. The production levels at the Japanese ‘transplants’ were widely different from their American counterparts. which is exactly analogous to the problem of ranking the automotive plants of different automakers. In other words. [10-14]. the ratio y/x = h + (c/x). Everyone. y) observations fall on a PERFECT straight line. has always agreed that the ratio y/x is NOT a constant. or for all the 20 countries in the original RR paper. even if all our empirical (x.In his April 22 discussion. I realized that if a straight line does NOT pass through the origin.000)/2 = 0.

negative intercept (h > 0. This is illustrated in Figures 1 and 2. BEFORE the 2008 financial crisis. provide an example of this Type II behavior. three distinct types of straight lines can be envisioned. when a positive slope h is observed with a simultaneous decrease in the values of both x and y. As the independent variable x increases both the dependent variable y as well as the ratio y/x increase. Table 1. its deeper consequences have largely been overlooked. Page | 11 . Many examples of Type III behavior can also be found when we analyze the financial data (profits and revenues) for various companies. Ref. positive intercept (h > 0. Several articles describing these findings can be found on this website. positive intercept (h < 0. the limiting value of the ratio y/x is the slope h of the straight line.g. The limiting value of the ratio y/x is the slope h of the straight line. c > 0). of the type y = hx + c. after the financial crisis of 2008 provide an example of Type I behavior. see Figures 1 and 3. Again. Type III: Negative slope. in the more general case)? Very briefly. All three cases described above and their “inverses” are observed when we analyze the (x. the limiting value of the ratio y/x is the slope h of the straight line. are related by either a linear law (or a nonlinear law. c > 0). As x increases both y and the ratio y/x decrease. Type II: Positive slope. quite surprisingly. x and y that enter into the ratio. As x increases y increases but the ratio y/x decreases. Again. The recent Debt-GDP data for Ireland (increasing debt with decreasing GDP) is an example of Type III behavior.  What are the implications of this property if our x-y observations suggest a simple linear law. if the two quantities. [9]. Type I: Positive slope. see bibliography list. e. see Table 2. However. The term “inverse” is used here to refer to the case of decreasing x instead of increasing x. c < 0). between two variables x and y?  Can we use the y/x ratio to evaluate performance and develop quality ratings. y) observations on many different systems. The Canadian Debt-GDP figures. The recent Canadian Debt-GDP figures.line does not pass the origin.

I have also discussed baseball batting statistics in Refs. If we use the Reinhart-Rogoff method. where we consider the percent On-Time arrivals for different airlines. We expect the profits y to increase as revenues x increase.14] to illustrate how the linear law (which describes the performance of a system) evolves from our most elementary observations with the aggregation of the data at different levels. To use a baseball analogy. indeed provides the answer to exactly this dilemma of how to “weight” the different y/x ratios which Herndon has discussed using the baseball analogy. The second player has a single at bat. Indeed. and we want to find the team’s overall batting average. A high profit margin. and so has a perfect 1.And.000. i. and therefore has a . is successful one-fifth of the time. “Unconventional” is appropriate in describing their averaging technique. without any reference to the Debt-GDP problem. we 1 Page | 12 . like Herndon. is the profit margin. is another example of the same weighting dilemma.. with some reflection. just noted. but gets on base in this one at-bat. [3]. the ratio y/x. The recent discussion of the Airline Quality Rating. If x is revenues and y is profits. a high value of the ratio y/x.200 batting average. it becomes incumbent upon us to first investigate the nature of the GDP-Debt (x-y) relation instead of using the y/x = Debt/GDP ratio indiscriminately. as measured by the growth of the GDP? This is the debate that has been triggered by the recent critique of Reinhart-Rogoff by the UMass economists. To quote Herndon from Ref. by definition. Generic examples of these three types of behavior. We will now pursue this point in the remainder of this article. desirable and is used to evaluate the financial performance of various companies. [13.e. suppose we had a team with two players. Is a low Debt/GDP ratio desirable? Does a high Debt/GDP ratio actually stifle economic growth. it will become clear that the linear law y = hx + c. is. the way we use the Debt/GDP ratio has not yet been challenged. and how the y/x ratio varies even on a perfect straight line. Because of the mathematical property of a straight line. The first player has 100 at bats. While several counterpoints have been made to repudiate RR. The same cannot be said about the Debt/GDP ratio. have been included in Appendix 1 to call attention to this fundamental property of a straight line and the behavior of y/x ratios. as discussed here.

regardless of whether they had one year of bad growth or many years of decent growth. The Herndon. rather than all the countries. However. Matthew O’Brien [5].200. in his piece in The Atlantic (April 16. whatever that may be.would equally weight the . Ash. but if you average all the years. for the years 2002 to 2012. What matters is whether it's the higher debt causing the slower growth. The Linear Debt-GDP law (2002-2012) In this section. Page | 13 . and Pollin paper doesn't change the big picture all that much. you get 2.2 percent growth. There's still no evidence of that. [15].200 and 1. The underlying problem is not that their method is necessarily wrong.600 batting average. just not as much as Reinhart and Rogoff claimed. The data was obtained.000 batting averages. But whether it slows down to 2. 2013). And. it was the combination of the weighting system with the exclusion – for whatever reason – that combined to cause the most significant fall in average GDP growth. Growth does tend to slow down when debt is high. § 4. asks. Reinhart and Rogoff weigh each equally. Because they just average the country averages. That's not necessarily wrong. There is nothing inherently wrong with their weighting system.1 percent doesn't really matter. and thus find that the team has an overall .2 percent or -0. and never has been. quite readily.1 percent Reinhart and Rogoff reported. see Ref. from the website of The Economist. but that it is particularly sensitive to outliers. However it is unusual and it is their obligation to be open and clear in explaining why they used this unusual methodology. Canada and Ireland. versus the -0. If the only problem was the weighting. we will consider the GDP and the Debt data for Australia. it would more or less remain . This contributed to the “perfect storm” of errors whose combined effect caused the large decline in average GDP. This “perfect storm” can be understood more easily by considering the Debt-GDP relation and the simple linear law. this would not have been sufficient to cause a drastic decline in average GDP growth. But is Reinhart and Rogoff's methodology even the right one? That's not clear. If we used conventional methods of calculating the team’s batting average.

061 24.7% to more than 100% between 2007 and 2012 and the falling values of the same ratio between 2002 and 2007.3 2005 0.185 0.737 75.9 2011 1.798 72. Trillions $ Trillions (converted to %) 2002 0.247 0. Year Page | 14 .039 34. y Debt/GDP.5 2010 0.149 0.5 2004 0.510 1.7 2008 0.163 73.205 0.2 Data Source: The Economist. Notice the rise in the Debt/GDP ratio (or percent) in the last column from a low of 24.7 2006 0.201 96.016 74.054 26. The Global Debt Clock (click here) Year Table 2: The Debt and GDP data for Ireland (2002-2012) GDP.222 0.267 83.223 108.7 2009 0.244 0.104 0. x Debt.408 85. y Debt/GDP.579 82.202 0.921 69.267 0. see example below).4 2011 0.123 50.977 0. The Global Debt Clock (click here. y/x $.199 0.2 2008 1.2 2003 0.4 2012 0.627 79.4 2004 0.056 30. y/x $.082 30.705 0.854 71.206 0.3 2006 1. x Debt.114 0.047 31.4 2005 1.4 Data Source: The Economist. Trillions $ Trillions (converted to %) 2002 0.9 2009 1.058 28.491 87.331 0.9999 67.Table 1: The Debt and GDP data for Canada (2002-2012) GDP.4 2007 0.8 2010 1.358 1.790 0.8 2012 1.209 0.641 1.473 0.710 1.1 2003 0.2 2007 1.

The debt remained virtually unchanged between 2008 and 2009 and then started rising again. the debt also increased but the Debt/GDP ratio (converted to a percentage) was decreasing. Following the financial crisis in the USA in 2008. However. With Ireland. This is Type II behavior. Page | 15 . This is Type I behavior.If we examine the Canadian data in Table 1. before the financial crisis of 2008 to a Type III behavior following the crisis. we see a transition from Type II behavior. we find that the Debt/GDP ratio is increasing. we find that as the GDP increased between 2002 and 2008. we find the Canadian GDP shrinking very slightly in 2009 and then rising again. in this most recent period.

18]. The corresponding linear relations between the GDP and the Debt are illustrated in Figures 2 and 3.20 1.80 1. The composite graph GDP-Debt graph is illustrated in Figure 4. see Refs. x [$.40 0. Page | 16 .00 0. The Type III behavior. before and after the financial crisis of 2008. is illustrated in Figure 5.40 GDP. Trillions] Figure 1: The falling and rising hyperbolas with the mathematical equation y/x = h + (c/x) describe the contrary trends in the Debt/GDP ratio for Canada.120 Post-2008 Financial Crisis 100 Debt/GDP. observed with Ireland. [17. y/x [%] 80 60 Pre-2008 Financial Crisis 40 20 0 0. The falling and rising hyperbolas in Figure 1 illustrate this trend in the Debt/GDP ratio. which also provide a worked example for the benefit of interested readers (without the needed background) who might have found this article because of the intense public debate on the Reinhart-Rogoff paper.00 2.60 2. The numerical values of the constants h and c were deduced using linear regression analysis (method of least squares).

18].00 0. y [$.40 Post-2008 Financial Crisis 0. x [$.584. The opposite trends are seen in the pre-2008 period with c > 0.584) r2 = 0. Trillions] Figure 2: The Canadian GDP-Debt data for 2008-2012 reveals a remarkable linear relation (with 2008 falling below the line).00 GDP.2. since c < 0.335x – 0.20 0.80 1.00 0.78 means a positive intercept x0 = 0. The GDP has been plotted on the horizontal axis (as the independent variable x) only because it appears as the denominator in the commonly used y/x = Debt/GDP ratio. No cause and effect relation can be attributed between the GDP and debt. Page | 17 . as illustrated later in Figures 6 and 7 for Australia.0. see Refs. It should be noted that only a strong positive correlation exists between the GDP and the debt.989 Type I Behavior 1. see Figure 3.78 = 1. Trillions] 1. The same trends are revealed if Debt is plotted on the x-axis and GDP on the y-axis.00 Debt.335(x – 0.80 2008 0. The negative intercept c = . the maximum value of the Debt/GDP ratio equals the slope h.40 0. The constants h and c can be fixed using the method of least squares. [17.60 2. or vice versa.20 1. the debt also increases but a fixed rate h given by the slope of the line.60 y = hx + c = h(x – x0) = 1. As the GDP increases. Also. The linear law y = hx + c leads to the hyperbolic laws describing the behavior of the Debt/GDP ratio.

as discussed in many other articles discussing economic and financial data.00 GDP.197.197 r2 = 0.20 Pre-2008 Financial Crisis 1. as given by equations 1 to 3 in the next section. The linear law y = hx + c = 0. x [$.1. The transition to the higher slope and the negative intercept is clearly one of the consequences of the financial crisis of 2008 as revealed here. or vice versa (uncontrolled debt increase due to the increasing GDP). the expressions for GDP growth rate which follow.20 y = hx + c = h(x – x0) = 0.00 0.40 0. with a positive slope (h > 0) and positive intercept (c > 0). reveal the importance of the nonzero intercept c.60 0. [9].80 1.20 1.9995 Type II Behavior 0.546x + 0.80 0. As the GDP increases. for 2002-2008.40 0.00 Debt. Page | 18 . Trillions] 0. in relation to the GDP. the debt also increases. obtained from The Economist. is essentially a matter of opinion and intense debate and is also at the root of the criticisms of the Reinhart-Rogoff findings.546 versus 1.60 2. Nonetheless.546 x + 0.00 0. y [$. However. Trillions] Figure 3: The pre-financial crisis GDP-Debt data for Canada. given by the slope h = ∆y/∆x. was significantly lower in this earlier period (0. see Ref. Whether the GDP increases because of the increased debt. the rate of growth of the debt.335 or about 40%).

40 0.05 0.25 0.20 1.00 0.60 2.30 0.25 0. Trillions] Figure 4: The pre-financial crisis GDP-Debt data for Canada.05 0.10 Ireland (2002-2012) 2012 8 2008 0.05 0.40 Page | 19 GDP.40 0.00 Debt.00 0.20 0. x [$.35 0.60 Canada (2002-2012) 2009 1.35 Debt.2.546 x + 0. Trillions] 1. x [$. Trillions] . obtained from The Economist.80 1.15 0. y [$.30 0.10 0.15 0.20 0.00 0. y [$.20 0. Type II linear law y = hx + c = 0.80 2008 0. for 2002-2008.00 GDP.00 -0.197. Trillions] 0. 0.

which was felt globally.011. as we see from the recent data for Australia.6 1.2 0.1 0 0. 0.4 0. A change from Type II behavior (h > 0. c > 0. x [$. The term “Inverse” Type III is used since the debt increases with decreasing GDP (instead of debt decreasing with increasing GDP to yield h < 0). r2 = 0. with GDP as the independent variable. which was felt globally. or that GDP increases because of the increased public debt incurred. the linear relation between these two quantities holds. y = -2.8 2. Page | 20 . plotted in Figure 6. the year of the financial crisis in the US. A distinct change is observed in the trends before and after 2008.3 0.659.2 1. y =0. and in Figure 7.2 0.e.849) to an inverse Type III behavior (h < 0 and c > 0.0 0. i. Trillions] Figure 6: The GDP-Debt diagram for Australia for the period 2002-2012.5 Debt. for the years 2002-2012.0 1.6 0.972) is observed before and after 2008.. r2 = 0. y [$. Trillions] Australia (2002-2012) 0.4 1.0 GDP.Figure 5: The GDP-Debt diagram for Ireland for the period 2002-2012. whether one believes that debt increases because of the increasing GDP. the year of the financial crisis in the US.183x + 0.8 1. with the debt as the independent variable (symbols x and y are NOT interchanged).4 0.233x + 0.6 0. Regardless of causations.

20 0. Type II behavior with y = 0. x [$.05.00 0. GDP growth rate = ∆x/x = ∆y/hx = ∆y/(y – c) = (∆y/y) /[1 – (c/y)] ……. k = 1/[1 – (c/y) …….661.507 with r2 = 0.(3) Page | 21 .978 and post-2008. § 5. Pre-2008..Pre-2008. Trillions] 1.50 Debt. GDP growth rate = ∆x/x = k (∆y/y) where. r2 = 0.094x + 0.978 and post-2008.39y – 0.00 GDP.. y [$. with r2 = 0. see Refs. GDP Growth Rate and the Linear Debt-GDP law The linear law means that when the GDP increases by ∆x.60 1.80 Australia (2002-2012) 0.472 x – 0. Trillions] Figure 7: The Debt-GDP diagram for Australia (2002-2012) with Debt plotted on the horizontal axis and GDP on the vertical axis. This also yields the following relations for the GDP growth which is defined as the percent change in the GDP between two consecutive periods of interest.31 with r2 = 0.. 2. Type I behavior with y = 0.(2) …….30 0.10 0. [19-24].104y + 0.40 0. x = 2. x = 10.20 0.40 0.00 0. the debt increases by ∆y = h∆x.993.993.(1) Or.

Japan (highest debt.079 8. The Global Debt Clock (click here) Equations 1 to 3 above are the consequences of the linear law relating the GDP x and the debt y.11 17.705 2003 0.061 8. The US (high debt and high GDP).Table 3: The GDP growth rate for Canada (2002-2012) Year GDP.199 0.13 2012 1.141 11.510 0. ∆x $ Trillions GDP growth rate.790 0. and Pollin [2].104 0. The GDP growth rate values (∆x/x) deduced for Canada are given in Table 3.29 2004 0.61 2010 1.048 8.358 0. Excluding these three countries. Trillions GDP change. high GDP) are the exceptions.89 Data Source: The Economist. ∆x/x (Converted to %) 2002 0. Herndon.331 0.85 2008 1.016 1. § 6.056 7.28 2006 1. and China (lowest debt.251 24.54 2005 1.473 0. x $.083 5.977 0. A nonlinearity in the growth rate. The 2012 Debt-GDP Relationship (30 Countries) The same general conclusions regarding the Debt-GDP relationship can deduced if we consider the data for several leading economies (30 countries) that were also considered by RR [1] and by the UMass-Amherst researchers. as evident from the GDP-Debt diagram in Figure 8.57 2009 1.710 0. Ash. This data has been compiled in Table 4 and was obtained from the Global debt clock at the website of The Economist.641 0. with increasing debt y is also implied by equation 3 and is a consequence of the nonzero intercept c in the linear law relating GDP and the debt. and considering only Page | 22 .02 2007 1.067 7. high GDP).7 2011 1.

463 0. Trillions 1.71 0.801 16.402 0.4 57.277 2.557 1. http://www.246 0.191 2.151 15.296 0.396 0.794 0.2 96.168 2.2 94.2 74.316 0.513 2.339 1.086 5.192 0.597 0.058 0.8 36.5 Again.4 Data source: The Economist.064 12.470 1.445 1. This is illustrated in Figure 9.1 160.182 0.1 73.8 95 84.3 0.124 2.484 1.7 69.4 60.414 2.541 3. see Global debt clock. Table 4 : The 2012 GDP-Debt data for leading economies Country Australia Austria Belgium Brazil Canada Canada China Denmark Finland France Germany Greece India Ireland Israel Italy Japan Malaysia Mexico Netherlands New Zealand Norway Portugal Russia Singapore South Africa Spain Sweden UK Ukraine USA USA GDP.330 Debt.155 0.888 9.563 0.1 66.901 0.economist.322 0.7 44.263 0.2 42.8 99.5 54.459 0.486 2.799 0.6 86 16.597 0.1732 0.138 0.798 1.5296 0.311 0.7 128.3 37.509 12.countries with a GDP of less than $4 T (trillion) reveals a general upward trend.456 Debt/GDP (y/x) (Converted to %) 27.398 0.3 8.206 0.984 0.242 0.259 0.4 76 82.6 51.2 120.3 116.112 0.567 1.441 0.3 215.624 1. regardless of what is the cause and what is the effect.222 0.254 2.410 0.223 2. we see a strong positive correlation between increasing GDP and increasing debt.4 48.399 1. x $. Trillions 0. at least for Page | 23 .8 38.498 0. y $. with debt increasing with increasing GDP.009 13.8 37.230 2.

relative to their GDP. have very low debt levels.the current global situation in 2012. The equation of the line joining these two points is y = 0.00 10.00 2. a) The (x. While historical trends give us deeper insights.00 6.00 4.00 8. i.00 18. it is the current trends that are most relevant and have to deal with. a Type I line with h > 0 and c < 0. Excluding these three countries.828(x – 0. Page | 24 .00 8.00 16.. for the 30 countries listed in Table 3.00 0.085). x [$.00 2.00 0.00 6. and also Russia. while Japan and the USA are the exceptions. and focusing on the 27 countries with GDP of less than $4 T (trillion). China.00 4.00 Debt. for 2012. Trillions] 12.00 GDP.00 14.828x – 0. y) pairs for USA and New Zealand provide two extremes.0705 = 0.00 12. Trillions] Figure 8: Graphical representation of the GDP-Debt data. y [$.00 10.e. 16.00 14.00 20. we can start analyzing the data and deduce the following quantitative results.

Trillions] 2.088). x [$. for 2012.00 1. Note that Israel and Ukraine were added to the list of 30 countries after this regression analysis was completed.095 = 0. y = 0. let us consider an extrapolation of the regression line deduced for the countries with the smaller GDP.50 2. c) Linear regression analysis (after eliminating USA.120) with a linear regression co-efficient r2 = 0.b) Likewise.792x – 0. after one allows Page | 25 .50 3.792x .50 1. and Japan for reasons mentioned) yields y = 0.00 0. the Germany and New Zealand (x.734 Germany Debt.095 r2 = 0. 3.00 -0.50 3. China.00 3. The results are not affected.00 Italy y = hx + c = h(x – x0) = 0. Now.734.50 0.50 2.00 2.864 (x – 0.0. y) pairs are joined by another Type I line.50 0.50 4.792 (x – 0.00 Russia 0.00 1.00 GDP.076 = 0. Trillions] Figure 9: Graphical representation of the GDP-Debt data. y [$. The current debt levels for the US (two data points for the US were obtained when scrolling on the map at The Economist) are consistent with those observed for the other countries. for the 25 countries listed in Table 3 with GDP of less than $4 T (trillion).50 1.864x – 0.

This is illustrated in Figure 10. the linear regression analysis suggests the rising trend. x [$. Finally.for the “size effect”. is also obvious from an examination of Figure 11a. Trillions] Japan 12 10 8 6 4 2 0 0 -2 2 4 6 8 10 12 14 16 18 USA China 20 22 GDP. Page | 26 . after (statistically) accounting for the higher GDP levels. y [$. the (statistically) rising values of the Debt-GDP ratio is illustrated in Figure 11a. the GDP in this relation. Although a falling trend in the Deb-GDP ratio (or percent) with increasing GDP. 18 16 14 Debt. The high debt held by the US is seen to be consistent with the debt levels for the smaller countries. which means the magnitude of x. although with the statistically deduced rising hyperbolic law (implied by the linear law illustrated in Figures 9 and 10). Trillions] Figure 10: Extrapolation of the best-fit line through the data for the countries with smaller GDP to the GDP levels of the US.

in 2008) by considering the examples of few advanced and emerging economies. Australia. notably. This is illustrated by the graph prepared in Figure 11b. The mathematical relation Page | 27 . Trillions] Figure 11a: The (statistically deduced) rising trend in the Debt-GDP ratio.00 1. Canada. with increasing GDP for 27 of the 30 countries considered in Table 4.50 3.00 0. GDP Growth ∆x/x versus Debt-GDP (y/x) ratio In this section we will discuss the effects of the Debt-GDP ratio during the period 2002-2012 (before and after the financial crisis in the US.00 3.A falling trend is suggested by the regression analysis for the data compiled in Table B earlier for the 10 countries deepest in debt. Brazil.50 1. 200 180 160 Debt/GDP.50 2. and Japan using the familiar performance of the GDP growth rate ∆x/x and the Debt-GDP ratio y/x. x [$. § 7. y/x [%] 140 120 100 80 60 40 20 0 0.00 2.00 GDP.50 4.

Page | 28 .957 T in the eleven year period.941 T (trillion) in 2002 to $5. All through the 21st century.between these two quantities. implied by the linear law. the Debt-GDP ratio for Japan has remained well above 100%. y) pair for Japan was excluded in developing the regression equation since Japan is clearly an “outlier” in this GDP-Debt diagram or the Debt/GDP versus GDP diagram. The (x. was presented earlier in §5 (GDP Growth rate and the linear law). However.897 T in 2012 and increase of $1. Trillions] Figure 11b: The (statistically deduced) falling trend in the Debt-GDP ratio for 10 countries deepest in debt. y/x [%] 180 160 140 120 100 80 60 40 20 0 0 2 4 6 8 10 12 14 16 18 20 GDP. y = hx + c. 240 220 200 Japan Debt/GDP. as illustrated in Figure 12. x [$. see Figure 13. see data in Table B. the Japanese GDP has NOT stopped “growing” and increased from $3.

The GDP. In fact. besides Japan. t [Calendar years] Figure 12: The rising values of the Debt-GDP ratio for Japan in the 21st century. Page | 29 .Even the significance of the terms “growth” and “growth rate” as applied to the economy.4% in 2002. defined as the percentage between consecutive periods of interest ( ∆x/x) and the Debt-GDP ratio (y/x) appears superfluous and fully contrived within the context of the linear law relating Debt and GDP. must thus be carefully reconsidered. perhaps. however. results when we consider the performance of several countries. an investigation of the relation between the GDP growth rate. this measure of economic performance leads to a confusing and. as we will see here. As noted already. with GDP being a measure of this performance.5% of the GDP having increased from 146. y/x [%] 200 150 100 50 Japan (2002-2012) 0 2000 2002 2004 2006 2008 2010 2012 2014 Time. The 2012 debt level is 215. did not stop growing. as illustrated in Figure 13. 250 Debt/GDP. also misleading.

00 1.00 10.00 6.00 Debt.00 GDP.00 1.00 12. x [$.00 2.00 GDP.00 14.958 5.00 8. y/x [%] 150 100 50 Japan (2002-2012) 0 0.00 3.00 4.00 5.00 0.00 6.00 2. Trillions] Page | 30 . x [$.00 3.00 6.293y + 2. y [$.250 200 Debt/GDP. Trillions] 7. Trillions] x = 0.00 0.338 r2 = 0.00 4.00 Japan (2002-2012) 2.00 16.00 4.00 7.

see Figure 14. Starting with Japan. The GDP “growth” is measured here in terms of the absolute GDP values for each year. as measured by ∆x/x value. or GDP. One can certainly postulate a negative trend. see also the Canadian trend in Figure 15.293 y + 2. Australia. Brazil and Canada illustrated in Figures 14 to 17.) The performance measure ∆x/x used for the economic.418x . we also see the opposite and positive trend between these variables. The GDP “growth” is measured here in terms of the absolute GDP values for each year. However. The correlation between these two measures of economic performance is also not clear. Figure 13b (bottom): The rising values of the GDP as Debt (and the Debt-GDP ratio) for Japan in the 21st century (2002-2012).338. there are periods of positive growth values of well above 5%. it follows that y = 3.) Page | 31 . Hence. is certainly being repudiated by one of the most advanced economies in the post-World War II era.Figure 13a (top): The rising values of the GDP and the Debt-GDP ratio for Japan in the 21st century. as shown by the line joining two extreme data points in Figure 14. the symbol y is retained. A very positive correlation between the Debt and GDP is revealed here with a nearly 50% increase in the GDP. although we see periods of negative growth rate.7. once the DebtGDP ratio exceeds 90%. the argument of weak economic growth.993 (Type I behavior according to the GDP-Debt classification. (No attempt has been made to develop a linear regression equation for the Japanese trend. Since x = 0. the symbol x is retained for the GDP plotted on the vertical axis. growth leads to inconsistent results as we see from the examples of Japan. Also. Although the Debt is plotted here on the horizontal axis.

00 -10. which is clearly a consequence of the financial crisis of 2008 in the US.00 5.00 Japan (2002-2012) 0. Page | 32 . At all other times.00 100 120 140 160 180 200 220 240 Debt/GDP ratio. A negative trend can again be postulated. For Canada.00 GDP Growth rate. as measured by was observed only for 2009. a negative growth rate.00 -5. ∆x/x [%] 10.15. The GDP “growth” as measured here shows periods of both positive and negative growth. the GDP growth rate was positive and above 5% (note that fractional ratios are being used in this graph without converting to %). A comparison of the Canadian and Japanese situations without wholly different Debt/GDP ratios only shows that the negative trend in ∆x/x values is UNRELATED to the high Debt-GDP ratios. converted to a percent) for Japan in the 21st century. y/x [%] Figure 14: The GDP growth rate (∆x/x) and the Debt-GDP ratio (y/x. A general negative trend could be postulated but this negated by observations on other economies. observed.

The Australian case is illustrated in Figure 16.) Brazil. GDP growth are also observed and correspond to the higher Debt/GDP ratios. Periods of low.60 Canada (2002-2012) 0. with negative slope. Page | 33 .00 -0.10 0.05 -0. The Debt/GDP ratio (converted here to percent) is quite low for Australia.90 1. ∆x/x 0.25 GDP Growth rate.05 0. not based on any numerical calculations.70 0.15 0. is the straight line joining the data for 2004 and 2012. y/x [%] Figure 15: A negative correlation between increasing Debt/GDP ratio (y/x) and the debt growth rate (∆x/x) for Canada. for the period 2002-2012.80 0.0. which also has a Debt-GDP below the critical threshold of 90% posited by Reinhart-Rogoff reveals a generally positive trend between the GDP growth rate (∆x/x) and the Debt/DGP ratio (y/x).20 0.10 0. The trend line.30 0. Even so both positive and negative trends in the GDP growth rate.00 Debt/GDP ratio. as measured by ∆x/x values are observed. (These are illustrative. and negative.

GDP Growth rate, ∆x/x [%]

35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 0 5 10 15 20 25 30

Australia (2002-2012)

Debt/GDP, y/x [%] GDP Growth rate, ∆x/x [%]
35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0

Brazil (2002-2012)










Debt/GDP, y/x [%]
Figures 16 and 17: Positive and negative correlations between increasing Debt/GDP ratio (y/x) and the debt growth rate (∆x/x) for Australia, for the period 2002-2012. The Brazilian data reveals a more consistent positive trend.
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§ 8. Brief Discussion and Conclusions
Long before Reinhart and Rogoff, and Herndon et al, the Debt/GDP ratio (y/x) and the GDP growth rate (∆x/x) have been used as measures of economic performance. What is surprising, however, is that the remarkably simple and linear relationship between the GDP x and the Debt y, as shown here for several countries taken individually, and also as a group, seems to have escaped the attention of the world’s leading economists. With tables of x and y values, such as those provided here, the preparation of a x-y scatter graph, to uncover any underlying trends, seems like the first and the most natural step to take in data analysis. Unfortunately, most economic and financial analysis (where we encounters tables of profits and revenues values for literally thousands of companies) seems to be focused on the analysis of y/x ratios and the “averaging” of such ratios. As explained nicely by Herndon, using the baseball analogy, can we simply average the country averages? That would be like averaging the batting averages of two players with scores of (100, 20) and (1, 1) where the first number is the At Bats and the second number the Hits. This leads us to the pregnant question posed by O’Brien: Is the Reinhart-Rogoff methodology even the right one? When millions are unemployed and kept out of work by austerity prescriptions, as noted by O’Brien, one does begin to wonder how we are using this y/x ratio analysis. The linear law, y = hx + c, relating the GDP x and the Public Debt y means that the GDP and the Debt cannot be treated as independent quantities which can enter into a y/x ratio which is then to be compared with the GDP growth rate, ∆x/x, the percent change in the GDP between two consecutive periods of interest. Indeed, it would seem that the “growing” debt with a “growing” GDP (or vice versa), as implied by the linear law, makes the need for any further investigations superfluous, such as the RR attempts to relate the Debt-GDP ratio (y/x) and the GDP (or economic) growth (∆x/x).
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What is the meaning of terms like GDP “growth” or GDP “growth rates”? The linear law suggests one simple answer. Growth can simply be taken to mean increasing values of the GDP, or the debt – the absolute magnitudes of these two quantities. There is no need to introduce additional metrics such as the percentage change ∆x/x. As we have seen here, there is no consistent correlation between measures like GDP growth parameters likes ∆x/x and the Debt/GDP ratio y/x. Hence, as discussed in many other Internet blogs (since the publication of the UMass paper on April 15, 2013, see also Herndon’s April 22, 2013 response), urgent attention must be paid to promote policies that will invigorate jobs creations and grow the GDP (via the increase in personal consumption, and increase of government receipts by increasing the tax base and the number of tax paying citizens who are employed, see equations 4 to 7 discussed later here) instead of the divisive obsession with “austerity” and the attempts to curb a growing public debt. The relationship between the GDP and the Debt (the cumulative value of the annual deficits) is indeed a complex one. As shown here, the Japanese GDP has been growing even as the Debt/GDP ratio has increased from nearly 150% to 215.5% between 2002 and 2012. With all due respect, in some ways, the historical data, going back two centuries, considered by Reinhart-Rogoff are simply irrelevant to the current problem of economic growth in a time of growing debt in economies all over the world. The instantaneous speed of a vehicle determines its position in the immediate future, not its average speed since the journey began, or the average speed attained by the driver, over the years, with all the vehicles that he or she has ever driven. The large mass of data analyzed by Reinhart-Rogoff (even if there were no coding errors in their Microsoft Excel programs) to support of their claim of a stifling of economic growth, with high Debt-GDP ratios, falls in the latter category.

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of a moving body. The ratio ν/L = (m2/s)/m = m/s. transport of matter. such as a quarter or a year. Lower numbers (< 2300) indicate laminar flow while higher numbers (> 4000) indicate turbulent flow. The first of such dimensionless numbers conceived was the Reynolds number. The Reynolds number Re = V/(ν/L) where the numerator V is the velocity of the fluid and the denominator ν/L has units of velocity with ν being a property of the fluid called the kinematic viscosity (units of m2/s. etc. The value of Re characterizes the regimes of smooth (or laminar) flow and turbulent flow in a fluid like water. click here). Page | 37 . The ratios v/c. such as heat flow. In the case of the US. c the speed of light. Here v is the speed. flowing past a body (like an aircraft or a moving automobile. if ever. or v/vs .Unlike the profits and the revenues of a company. also called dimensionless numbers. the national debt is the aggregated value since January 1835. through which the fluid is flowing. or within a pipe. meters squared per second) and L is a relevant length unit (such as diameter of a pipe. fluid flow. discussed. Ratios such as profit/revenues (both in same currency units and measured over the same time period) are pure numbers. strictly speaking. The use of the proper dimensionless numbers greatly aids in our understanding of many complex phenomena. and vs the speed of sound. Hence. (named after Osborne Reynolds. The ratio v/vs is known as the Mach number and Mach 1 means that the aircraft is moving at the speed of sound and Mach numbers greater than 1 refer to supersonic or hypersonic speeds. What is the date on which the debt was zero for other countries? This is rarely. the ratio Debt/GDP is NOT a dimensionless quantity and has units of time. used in physics (Einstein’s theory of relativity) and engineering (aeronautics) are pure numbers. which refer to their values over a specific time interval. or blood vessel. the debt is the aggregated value over many years. or air. or the velocity. or even our blood vessels). Such “pure” numbers. are used to describe various complex phenomena and processes. or the GDP of a country. Re. or some other significant length unit).

Robert Shiller.26]). the US debt was $0). Page | 38 . debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of time. A more exhaustive survey of the effect of the Debt/GDP ratio seems unnecessary due to: a) Its fundamental flaws with regard to the time units. or one quarter) is implied in GDP. only a little more so at the higher ratios (nonlinearity). except for seasonal industries like agriculture. Since the unit of time (one year. [25. especially with Australia and Brazil. To quote. we will have a “true” dimensionless number which characterizes an economy in “turbulent” times. “Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP? That would clearly be nonsense. as noted by Shiller. as we see from the comparison of the more recent data (2002-2012). A year is the time that it takes for the earth to orbit the sun.” Perhaps. After all. the debt has been accumulating since 1835 when. for a brief period under President Andrew Jackson. has no particular economic significance. the growth rate always decreases with increasing values of the Debt/GDP ratio. Refs. whereas the Debt is an aggregated value over time. and b) The linear law relating the GDP x and the Debt y The linear relation between the Debt and GDP revealed here is hardly surprising if we consider the following expressions. the center piece of the Reinhart-Rogoff paper. has discussed this in a 2011 piece (click here. one must be careful when using the Debt/GDP ratio. someday. However.Indeed. The Yale economist. which. No country is expected to pay off the Debt in a single year. There is nothing special about using a year as that unit. we also see the opposite trend. Also. the lack of a consistent relation between the GDP growth parameter (∆x/x) and the Debt/GDP ratio (y/x) may be rooted in this improper use of a ratio – without a proper accounting of the time units that enter into the two measurements. (In the case of the US.

413 9.53 Data Source: GDP values from The Economist.687 0. Table 5: The US Annual Deficits and GDP (2002-2012) Annual Deficit D Deficit/GDP $ Trillions (Converted to %) (from Budget) 2012 15.(4) …….174 1. Trillions .27 2007 13.(5) In equation 4. or spending.96 2005 11.GDP = C + I + G + (X – M) = A + G Deficit (or Surplus) = Govt..69 2003 10.248 1. witnessed decreasing deficits which then turned into a surplus during the second term.2996 8.087 7.) Page | 39 Year GDP. 2000 and 2001. The Global Debt Clock (click here) and Annual Deficits from President’s Budget (click here) The parameter “A” lumps together all items in equation 4 except government spending G. G is government spending.555 1.459 3. which applies for a year (or a quarter) C is private consumption.19 2009 14. the Clinton years.677 0. see discussion in the articles listed under Ref.93 2010 14. X is the value of all exports and M is the value of all the imports (click here). [9].. x $.403 0.16 2011 14.378 3. click here.197 0. is greater than the receipts. 1999.158 1.021 0.326 0. a deficit is incurred. If outlays. The debt is the aggregated value of all the deficits over many such time periods.294 9.97 2008 14.54 2002 10.161 1. In equation 5. Spending ……. Receipts – Govt.318 2. the government’s annual deficit (or surplus) is the difference between its receipts (usually from taxes.67 2004 11. (In recent history.179 1. or spending. in the years 1998.413 3.20 2006 12.079 1.921 0. hence increasing the number of employed and reducing unemployment will boost the GDP and reduce the Debt/GDP ratio as well) and its outlays. I is gross investment.

the graph of the GDP versus the annual deficits (AD) might also reveal a linearity.A’/GDP …….00 2000 Annual GDP [Calendar years] Annual Deficit (AD) [Calendar years] 2002 2004 2006 2008 2010 2012 2014 Time. D/GDP = 1 . [27]. similar to the GDP-Debt graph. the GDP has continued to grow.00 Annual GDP or Deficit [$. and the GDP.00 4.(7) Thus. T] 14.00 0. have been compiled in Table 5. the Surplus S = (R – G) or G = (R – S) = R + D if we use one year as the basis. see Figure 18.00 2. t [Calendar years] Figure 18: Growth of the US annual deficits and the GDP for 2002-2012.00 6. Notice that even as concerns over the annual deficits (now in excess of a trillion dollars each year) and the mushrooming national debt (now in excess of $16 T) have mounted (with studies such as Reinhart-Rogoff issuing dire warnings). Combining equations 4 and 5 we arrive at (which apply for one year): GDP = A + R + D = A’ + D Or. The annual deficits..00 8. obtained from Ref.. [15].(6) ……. Page | 40 .Thus.00 12. obtained from Ref. 16. Here R is receipts and D is the deficit (which is a negative surplus).00 10.

we consider the following plot of ∆y/y. T] 1. ∆y = (y2 – y1) and ∆x = (x2 – x1) where subscripts “1” and “2” denote the start and end of the time period of interest.40 0. the fractional change in the debt between any two years of interest (need not be consecutive) and ∆x/x. This means (x2 /x1) = (1 + rx). the fractional change in the GDP.60 0. ∆y/y =ry = (y2 /y1) – 1 or (y2 /y1) = (1 + ry). during the same period.00 12. has increased but is still less than 10%.40 1.00 2004 2008 2007 11. 2002 and 2012. and in the years immediately following the financial crisis (see also the remarks by Gordon in Refs. for example.00 15.The annual deficit (AD) to GDP ratio or percent. Thus. following the financial crisis of 2008 and the subsequent decline since 2010. 1. [25.60 2009 1.80 0. Finally.26]). Likewise.00 14.00 0.00 13. Hence. the ratio ∆x/x1 = rx = (x2 /x1) – 1. Short line segments with both positive and negative slopes can be seen in the AD-GDP graph of Figure 19.20 0. AD/GDP.00 10.T] Figure 19: Rapid rise in the US annual deficits.20 2010 2012 Annual Deficit [$.00 Annual GDP [$. The annual US budget deficit is less than 10% of the GDP in 2012. Page | 41 .00 16. as of 2012.

NOT percent changes.00 UK 3. Although there is clearly a lot of scatter. the debt ratio (y2 /y1) = (1 + ry) = 3 and so on. The use of these fractional changes avoids some of the issues with weighting and the averaging of the GDP growth (for different countries.Thus. ∆x/x = (1 + rx) 5.00 5.00 Chile 2. As discussed in the text. are being used here. ∆y/y = 1 means a doubling of debt relative to the starting year of 2002.00 Japan 1. over several years) that have now become apparent with the Reinhart-Rogoff methodology. Africa India Germany Canada Norway 1.00 Ireland 4. Page | 42 .00 Russia 4. Fractional change in GDP.00 0. A graph of ∆y/y versus ∆x/x for the 30 countries in Table 4 is presented in Figure 20.00 Fractional change in debt.00 S. the debt ratio (y2 /y1) = 1 + ry = 2and when ∆y/y = ry = 2.00 China ∆y/y = ∆x/x Brazil Australia Malaysia 3. Note that fractional changes (improper fractions greater than one). ∆y/y = (1 + ry) Figure 20: The fractional changes in the debt and the GDP for 30 leading economies for the period 2002-2012. this diagram reveals that increasing debt levels are also accompanied by increasing GDP levels.00 USA 2.00 0. when ∆y/y = ry = 1.

799 1.872 1.435 3.527 0.368 0.452 1.89 0.854 1.468 1.413 0.254 138.193 0.099 0.434 0.120 0.691 1.753 0.128 1.696 2.962 2.548 2.966 2.914 0.690 1.155 1. ∆y/y 3.424 1.170 1.684 1.959 1.982 0.862 2.949 4.388 0.694 0.575 1.473 0.151 2.206 2.778 0.205 0.655 1. Countries with bolded names do not appear in Table 1 of Reinhart-Rogoff.361 2.218 2. In the diagrammatic representation of the GDP-Debt data suggested here.804 0.442 1.469 Ratio of (∆x/x)/(∆y/y) 0.856 1.749 0.851 0.446 0.718 0.971 1.221 The countries highlighted by yellow in the last column fall above the line ∆y/y = ∆x/x in Figure 20.035 2.577 0.600 0.648 0.714 0.759 0.122 Fractional GDP Change.214 1.905 2. those that fall above the line ∆y/y = Page | 43 .Table 6: Changes in GDP relative to Debt (2002-2012) for 30 leading economies Country Australia Austria Belgium Brazil Canada Chile China Denmark Finland France Germany Greece India Ireland Israel Italy Japan Malaysia Mexico Netherlands New Zealand Norway Portugal Russia Singapore South Africa Spain Sweden UK USA Fractional Debt Change.453 2.939 0.218 0.322 0.972 3.915 0.727 4.523 0.866 0. all countries can be divided into two groups.831 1.296 0.424 0.553 4.746 0.525 0.57 0.425 2.458 2.021 2.498 1.070 1.800 0.745 0.062 1.723 0.095 1.657 2. ∆x/x 2.849 0.

Russia was able to grow its GDP. Note that the use of the new metric for Japan ∆y/y and ∆x/x as opposed to the Debt/GDP ratio puts Japan in a different relationship with Germany and Canada. with increasing debt and increasing growth. A review of Figure 20 reveals an interesting pattern. the Debt has accrued over many years which are NOT the same for each country.∆x/x and those that fall below this line. Unlike the GDP. Time intervals much longer than a decade (as the Reinhart-Rogoff studies) seem to be totally irrelevant if one is trying to formulate policy based on such an “academic” analysis of the Debt-GDP data. the effects of crippling high debts (with Debt/GDP ratio above 90%) on GDP growth (or economic growth) appears to be very country specific. during the period 2002 to 2012 with very little increase in its debt. and South Africa) fall above the line ∆y/y = ∆x/x. The other BRICS nations also had much higher GDP growth than debt growth (∆x/x > ∆y/y). we are talking about a much shorter time period for debt accumulation. China. The advanced economies like USA. All of the emerging economies. UK. as with the ‘Greek episode’ illustrated in Figure 21. we can see a clear path running across and cutting the line ∆y/y = ∆x/x from Japan to Germany to Canada to India to South Africa to China. Page | 44 . and Canada. or “dimensionless” numbers. fall below the line but still showed a growth in their GDP although the debt has also increased. as noted by Reinhart in recent response (see references cited). Japan. like 2002 and 2012 in the above comparison. for example. This comparison avoids the difficulties with the Debt/GDP ratio noted earlier in the discussion of “pure” numbers. By considering the changes ∆y/y and ∆x/x over defined time intervals. we do see negative effects of high debt. the BRICS nations (Brazil. or even Russia (post-Communist). Even high debts are associated with growth when we consider the time span of a decade. we overcome this fundamental difficulty with the use of the Debt/GDP ratio. Thus. For the USA. the debt has been accumulating since 1835 whereas for an emerging country like India or South Africa. On much shorter time scales. especially in this politically charged debate about austerity and the long term effect of the debt burden on economic growth. India. Indeed. Russia.

50 GDP. x [$. Trillions] -0. After the 2008 financial crisis.10 0.6% (in 2005) to a high of 160.6 0.30 0.015 = 1.5 Debt. The linear regression line deduced in Figure 21 is based on the data for the years 2002 and 2007 with the data for 2008 to 2012 showing the reversal in the direction of movement on this GDP-Debt graph.40 0. y [$. Trillions] 0.2 Figure 21: The Greek ‘episode’ of the last decade (2002-2012) when the Debt/GDP ratio varied from a low of 99.088(x – 0.3 0. However.982 Type I Behavior Greece (2002-2012) 0.013) r2 = 0. Following the crisis years of 2008 and 2009.4 0. the GDp-Debt graph shows a nearly constant upward slope during this entire ‘episode’. The Debt/GDP ratio came down slightly reaching the lowest in 2005 and then started rising.1 0 0.00 -0. the GDP started shrinking and the debt increased.0.088x – 0.20 0.1 y = hx + c = h(x – x0) = 1. Page | 45 . the Greek data reveals an actual shrinking of the GDP as debt levels continued to rise and the Debt/GDP ratio increased. The x-y graph actually reveals a pattern of ‘curling’ back upon itself.2 0. showing the ‘curling’ back upon itself pattern.5% (in 2012).

This is confirmed here by the new diagrammatic representation of the Debt growth versus GDP growth data using the ∆y/y versus ∆x/x plot. 2. quite surprisingly. The Debt/GDP ratio and the economic growth debate seems to be getting murkier during this past week. with Reinhart suggesting (in her rebuttals to HAP) that there is no magic threshold (of say 90%) at which economic growth slows down. Indeed. is tenuous at best (even without the Microsoft Excel coding errors reported by the UMass economists). A higher C can be achieved by promoting policies that create jobs. theoretical conceivable. the remarkably simple and linear relationship between the GDP x and the Debt y. which follow from higher taxes collected.In Conclusion. as shown here for several economies has been overlooked by economists. This means that the Debt and GDP are not independent of each other and the linkage of the Debt/GDP y/x ratio to the GDP growth rate. Hence. the higher the available income that can boost consumption C. ∆x/x. The cumulative value of the annual deficit (AD) is the total national debt D. it is clear that the Debt/GDP ratio can be reduced (assuming this is the correct economic prescription) by focusing on policies that increase the private consumption C and government spending G. It would also help boost government spending G via higher the government receipts. the two important components of the GDP. or citizens with jobs. The higher the number of employed. The focus can thus be shifted to economic growth which means Page | 46 . as shown here there is no consistent relationship between y/x and ∆x/x whereas all the three. Long before Reinhart and Rogoff. 3. Everything is country specific. Higher government receipts also mean lower deficits and hence smaller additions to the debt. 1. and Herndon et al. the Debt/GDP ratio (y/x) and the GDP growth rate (∆x/x) have been used measures of economic performance. which means more taxing paying citizens. x-y relations are observed when we consider the readily available economic data for several countries. However. The linear law relating the Debt and GDP appears to be a consequence of the basic expressions used to compute the annual values of the GDP and the annual government budget deficits.

an emerging economy.5% in 2012 is noteworthy. The extraordinarily high Debt/GDP ratios (nearly 2. show that an increasing. It increased from $3. such as the Debt-GDP relation. which also takes into account the significance of the linear law relating the GDP and the debt. 5. the profits-revenues relation. boosting the GDP instead of “austerity” programs aimed solely at cutting the Debt/GDP ratios and reduced social spending that benefits the poor and the middle class. which increased from about 150% in 2002 to 215. and so on. even centuries) and varies widely between different countries. y = hx + c.901 T in 2012. and other examples cited in the main text. 8.4.5 times the threshold of 90% according to Reinhart-Rogoff) did NOT prevent the Japanese GDP from growing. is NOT a barrier to economic growth. the unemployed-labor force relation. 6. This avoids the difficulties with improper accouting of time factors implicit in the public debt. although less than the 90% threshold of Reinhart-Rogoff. Periods of both negative growth (∆x/x < 0) and high growth (∆x/x > 5%) were observed negating one of the most fundamental and basic premise of the RR austerity prescriptions. Brazil. In each case. 7. A new diagrammatic representation is suggested to assess the GDP growth (∆x/x) relative to Debt growth (∆y/y). Page | 47 .938 T in 2002 to $5. or a high Debt/GDP. is observed with bewildering implications for the y/x ratio depending on the numerical values of h and c and how they change as the control variable x increases or decreases. with a crushing Debt/GDP. The widespread use of y/x ratios in economics and other financial data analysis must be re-examined and attempts must be made to understand the nature of the underlying x-y relations. These topics have been discussed in other articles that may be found at this website. The Japanese and Brazilian examples. with very low unemployment levels (approaching theoretical full employment) is an example of a country with high growth (∆x/x > 10%) with increasing values of the Debt/GDP ratio. which has accrued over many years (decades. especially the advanced economies and the emerging economies. it can be shown that a simple linear law. The example of Japan.

Rather this is meant to be a discussion about how we use y/x ratios like the Debt/GDP ratio in the current problem. essentially indiscriminately. A nonzero intercept c is present in many problems that we try to analyze and is akin to Einstein’s work function in physics. the Debt/GDP ratio or GDP Growth. There are many such y/x ratios that are being used. nothing ever will. without investigating the underlying x-y relation. business. The Reinhart-Rogoff error debate seemed like a good opportunity to get this message across.This is NOT about Reinhart-Rogoff. Page | 48 . or other social and political analyses. the Debt. The discussion here is aimed to highlight this fundamental problem in economic. If this does NOT get economists. Its generalization outside physics has been discussed separately. financial and business analysts thinking about how we (ab)use y/x ratios. financial. That would be an incidental outcome. GDP.

7 percent versus 3. http://www.Reference List 1. risk premia begin to rise sharply. It is noteworthy. by Thomas Herndon. by Matthew O’Brien. http://www. A general result of our “debt intolerance” analysis. April 4. debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity 88b1/publication/566/ April 15.nber. The Atlantic. Why are there thresholds in debt. The Great Debt Delusion: How Math Keeps Proving Austerity Wrong. highlights that as debt levels rise towards historical limits. Guest Post: The Grad Student who took down Reinhart-Rogoff Explains Why They’re Fundamentally Wrong. Rogoff. and why 90 percent? This is an important question that merits further research. Page | 49 . on page 23. 2013. The Next New Deal. by Carmen Reinhart and Kenneth S. Working Paper 15639. 2013.pdf NBER Series. http://www. 2013. by Thomas Herndon. Business Insider. 5. and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP). that those high-growth high-debt observations are clustered in the years following World War II. facing highly indebted governments with difficult tradeoffs. Guest See also references to internet blogs cited by Dube. however. April 22. On page 11.umass. Does High Public Debt Stifle Economic Growth? A Critique of Reinhart/Rogoff. 2013. however. And. As we argued in that paper. 3. by Arindrajit Dube. and Robert Pollin. and Savastano (2003). April 17.7 percent when debt is low (under 30 percent of GDP). Michael Ash. debt in excess of 90 percent has typically been associated with mean growth of 1. but we would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of “debt intolerance” in Reinhart. Growth in a Time Before Debt.nextnewdeal. with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. there is considerable variation across the countries.peri. Over the past two centuries. Of course. Reinhart/Rogoff and Growth in a Time Before Debt. The Roosevelt Institute. 2. http://www.

taxresearch. Bowen (Purdue Revisiting Reinhart-Rogoff: Free Exchange. http://www. 2013. by Dr.scribd.purdue. W. Published April 17. April Airline Quality Rating 2013. April 8. 10. 2013 http://www. April Airline Quality Report: An Analysis of On-Time Percentages. College of Technology) and Dr. The Economist. http://www. Purdue Babe Ruth’s 1923 Batting Statistics and Einstein’s Work When Economists are Wrong. 13. by R A.php/blogs/cepr-blog/the-reinhart-rogoffdebt-to-gdp-error-why-it-matte Tax research UK: Richard Murphy on Tax and Economics. http://www. Frank Barton School of Business) http://docs. Brent D. 2013. Published April The Reinhart-Rogoff Debt-to-GDP Error: Why it Matters? By Dean Baker.6. 9. Published April 18. Page | 50 . Bibliography. 11. http://www. 7. Airline Quality Report 2013: An Analysis of On-Time Percentages. 12. 2013. Center for Economic Policy Research. http://www. 8.economist. we all Suffer. Compiled on April 16. Articles on Extension of Planck’s Ideas and Einstein’s Ideas beyond physics. Headley (Wichita State University. 2013. e-Pubs. 2013.scribd. Posted on April 18. 2013.cepr. Dean E.

for 2012. Line of Best-Fit. h = ∑ (x – xm)(y – ym)/ ∑ (x – xm)2 Determine the deviations of the individual x and y values from the “mean”. On Least Then. Babe Ruth Batting Statistics and Einstein’s Work Function. This gives the numerator in the expression for h.huffingtonpost. y. The exact formula. The regression coefficient r2 = 1 .pdf 18. Least Squares Method. Legendre. English Translation of the original paper http://www.yb)2 / ∑(y. See example of data for Canada. ym). Compiled by 24/7 Wall Street Determine the product (x – xm)(y – ym) and their sum. with xm and ym denoting the “mean” or “average” values of x and y in the data 16. This also fixes the intercept c via ym = hxm = c .html The formula for h used in this example is an actually approximate one and was used. ym). For a perfect correlation. http://www. when all points lie exactly on the The global debt clock.york. This gives the denominator in the expression for h. To be Published April 17.html 17. Page | 51 . http://www. x2 and xy. Determine the square (x – xm)2 and the sum. before the advent of modern computers. and ym = hxm + c since the “bestfit” line always passes through the point (xm . in Huffington Post.14. is given below. Ten Countries Deepest in Debt. (x – xm) and (y – ym). or “average”.economist. since it only involves the determination of x2 and xy and the sum of all the values of x. This can be checked by assigning other values for h (using any two points) and allowing the graph to pivot around ( 15. 2013.yb)2.{ ∑( } is a measure of the strength of the correlation between x and y (or y/x versus x). using the regression equation. The Economist. see worked example given http://hotmath.scribd. The sum of these squares is a minimum. determine the predicted value yb on the best-fit line and the vertical deviation (y – yb) and the squares (y. r2 =+1.

Gross Domestic Product (GDP).htm 21. It has been widely noted that 2009 will have the first "trillion-dollar deficit" in American history.treas.pdf 28. 22. ded_about_debt. http://www. Click on Historical tables for the annual deficits data http://www. page 23. Just call the money borrowed from the Social Security trust fund an "intragovernmental transfer" and exclude it from the calculation of the 26. http://useconomy. http://en.fool. July 21. A Short History of the National Debt. http://en.wsj. How to Calculate the Real GDP Growth Rate? By C. http://en. Corporate managers have gone to jail for less book cooking than that. List of countries by GDP growth rate.wikipedia. by Robert J Deluded about debt. 2011.projectsyndicate. Bureau of Public Debt. In fiscal 2008. List of countries by GDP (nominal) Concluding remarks from this nice article on the history of the US national debt. the national debt increased from $9 trillion to slightly over $10 Yet the budget deficit in the last fiscal year was officially reported as being $455 billion. by John Steele 25. see Table 1. for historical values of deficits/surpluses http://www. What is the GDP Growth Rate? By Kimberly Amadeo. by Robert Shiller. Page | 52 . 20. http://wiki.html 27. Debt and Delusion.wikipedia. 29. The President’s Budget for fiscal year See US Public Debt on home page and click on US debt to the penny.1. How could the national debt have increased by considerably more than twice the "deficit"? Simple.wikipedia. July 21.slate. Actually it's the second.publicdebt. Slate Magazine. http://www.wikipedia. Economic 23.

politifact. by William Hogeland. http://www.html 32. Does high debt merely reflect weaker tax revenues and slower growth? Or does high debt undermine growth? Our view has always been that causality runs in both directions. in response to a paper released on April 15 by three researchers from the University of Massachusetts at Amherst. Reinhart-Rogoff Rebuttal says UMass Critics Politicized Debate. Fla.30. April 26. In his report. 33.” “Growth in a Time of Debt” concluded that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth. Why the Founding Fathers loved the National Debt. Still.html The academic literature on debt and growth has for some time been focused on identifying causality.sparknotes. 2013. the error didn’t change the basic findings of their research. Reinhart and Rogoff today addressed the technical issues raised by their critics With the approval of President Washington. candidate Thomas Herndon and professors Michael Ash and Robert Pollin -. he prepared the first Report on Public Credit. http://www.html The economists acknowledged on April 17 that they had inadvertently left some data out of their calculations in the study. House Budget Committee Chairman Paul Ryan and European Union Economic and Monetary Affairs Commissioner Olli Rehn in defense of their arguments against high budget deficits. which was submitted to the Congress in January 1790. Bloomberg. they said. Hamilton estimated the US debt at $54 million with the states owing an additional $25 million (total of $79 million). January 25.typepad.rhtml 31. Senator says January 8 was the only day the US was debt free. http://www. by Sharon Chen. Growth. 2013. Carmen Reinhart and Ken Rogoff: Debt. http://delong. 34.D. Hamilton wanted to ensure financial stability of the new nation and build a strong national government.Ph. In a paper Page | 53 . 2013. and Austerity Debate. April particular that they had committed serious errors of “selective exclusion of available data” and “unconventional weighting of summary statistics. and that there is no rule that applies across all times and places. Building the State (1789-1797): Alexander Hamilton and Finance in the Washington Administration. It has been cited by The following added after initial publication on April 26.

Page | 54 . The Grad Student Who Took Down Reinhart Rogoff Explains Why they are Fundamentally Wrong.35. Robert Samuelson tries to Salvage Reinhart-Rogoff and Austerity. April Business Insider. Reinhart/Rogoff and Growth in a time before 2012.php/blogs/beatthe-press/reinhart-and-rogoff-are-not-beingstraight?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+be at_the_press+ published last year with Vincent R. Blog Post by The Century Foundation.businessinsider. by Dean Baker.tcf. Edward 2013. http://www. 2013. Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes.html 38. April 16. which also reveals a work function. Reinhart and Rogoff are not being straight. we looked at virtually all episodes of sustained high debt in the advanced economies since 1800. April 25.cepr. Center for Economic and Policy Research (CEPR) Blog. This is discussed here and also compared to the batting stats of a baseball player. 37. April 26. as conservative politicians have suggested. http://www. 2013.cepr. http://www. similar to Einstein’s work function from physics. April The nonzero intercept c. How a student took down eminent economists on debt issue – and won. 39. Is the evidence of austerity based on an Excel spreadsheet error? By Brad Plummer. Reinhart. in y = hx + 36. by Thomas Henderson http://www.scribd. http://news. http://www. 2013. Center for Economic and Policy Research. http://www. Iceland votes against austerity: Analysis of the GDP-Debt Data. 2013.php/blogs/beat-the-press/robert-samuelson-triesto-salvage-reinhart-rogoff-and-austerity 41. Published April 28. may be thought of as a work

A doubling of x produces a doubling of y.50 15 10 5 0 0 10 20 30 40 50 Independent variable.Appendix 1 Interesting Mathematical Property of Ratios and an Overlooked Property of a Straight line 25 Dependent variable. x Figure A1. a tripling of x produces a tripling and so on. We will consider here some simple illustrations to highlight the behavior of the y/x ratio as we move up and down the four different types of straight lines illustrated in Figures 1 and 2 of this appendix.1: The straight line y = mx passing through the origin.5x y/x = m = 0. Page | 55 . The ratio y/x = m = constant as we move up or down this line and is equal to the slope of the line. 0) and has the equation y = mx. y 20 y = mx = 0. The straight line in Figure 1 passes through the origin (0. The ratio y/x = m = constant at all points along this line. You can check out the x and y values by following the gridlines.

The behavior y/x is illustrated in Figures 3a and 3b.2: Three types of straight lines that do NOT pass through the origin. the ratio of profits y to revenues x. think about what this means when we use simple y/x ratios to make important decisions. consider the situation when the straight line does not pass through the origin. Now. like we do on a daily basis. The earning per share is a ratio. What does the nonzero intercept c mean? What does it signify? Page | 56 . Now. as illustrated in Figure 2. The familiar profit margin of a company is a ratio. Intercept c < 0 5 0 Type III Slope h < 0.25 Dependent variable. Intercept c > 0 15 10 Type I Slope h > 0. x Figure A1. y 20 Type II Slope h > 0. the ratio of earnings (another name for profits) and the total number of outstanding shares. there must be a nonzero intercept. Intercept c > 0 0 10 20 30 40 50 -5 Independent variable. Is there a nonzero intercept in these problems? Does a doubling of revenues lead to a doubling of profits? If the answer is NO.

5 + (2/x) The ratio y/x 0. c < 0): The ratio y/x increases as x increases (and vice versa when x decreases). The ratio y/x is a constant at all points on a straight line only it passes through the origin.0 0. c > 0): The ratio y/x decreases as x increases when we move up this straight line (as vice versa when x decreases).2 0. if the straight line does NOT pass through the origin.3a: The ratio y/x is NOT a constant and varies on different points on a straight line.1 0. Eventually. c > 0): The ratio y/x decreases as x increases when we move down this straight line.5x y/x = 0.3 0. negative intercept (h > 0.5 .6 0. However. positive intercept (h < 0. x Figure A1. Type I: Positive slope.5x . y becomes negative and the ratio y/x also becomes negative and reaches the limiting value h < 0. Page | 57 . the maximum value of the y/x ratio is h. the graph of y/x versus x is an upward sloping hyperbola since y/x = h + (c/x). positive intercept (h > 0.5x + 2 y/x = 0.0 0 20 40 60 80 y = 0.8 y = 0.(2/x) 100 120 Independent variable.5 A B C y = 0.5 0. Type III: Negative slope. Mathematically speaking. The limiting value of y/x is again equal to h. Type II: Positive slope.9 0.7 0. the slope of the line.2 y/x = 0.1.4 0.

the ratio y/x becomes negative and approaches the limiting value of h = -0. equation 1 reduces to the general equation for a straight line and covers all the cases just discussed.50 -1.5 + (20/x) 40 60 80 100 120 Independent variable. y = -0. c < 0). The graph is a falling hyperbola. y = mxn [e-ax / (1 + be-ax) ] + c ……. y/x → h. c > 0) straight lines.5..3b: Variation of the ratio y/x on the Type III line. as x → ∞. a = 0 and b = 0. for all three cases. the slope of the line. As x increases.00 0. the ratio y/x = -0. x Figure A1.5x + 20. Type II (h > 0. c > 0) and Type III (h < 0. We will discuss equation 1 in more detail later in this article. we get the nonlinear equation 1 below.50 0.(1) 2.If we put all the three cases together. at very large values of x.50 2. The smooth curve is the graph of equation 1 with the Page | 58 . For x > 40.50 1. (Mathematically speaking. The three dashes line in Figure 3c are the Type I (h > 0. This is called the asymptotic value of the ratio y/x for very large x.) For the special case of n = 1.00 The ratio y/x 1.00 0 20 y = -0.5 + (20/x) decrease continuously and becomes zero when x = 40.00 -0.5x + 20 y/x = -0.

such as the On-Time (OT) arrival ratio discussed here in detail must be considered against this background. unemployment rate. various fatality rates (like the currents gun deaths versus car deaths controversy) are all examples of how we use y/x ratios. The x-y relation. The use of various y/x ratios.6 Dependent variable.0 0. labor productivity. earnings per share. The maximum point occurs at x = xm = n/a = 0. a = 0. y 1.0 -0. n = 0. x Figure A1. The same Page | 59 .6 0.4 1. birth rates.1 = 5.0.values of m = 1. Profit margin.5.1 b = 0 and c = -0.2 0. y = mxne-ax.2 1.1.8 1. All the three types of straight lines can be thought of as small segments of this general curve relating the variables x and y. death rates.8 0.4 0.3c: The simplest mathematical equation relating the variables x and y with a maximum point. 1. The use of such a y/x ratio clearly favors smaller airlines and puts the bigger ones (like Southwest Airlines with more than 1 million flights) at a disadvantage. such as the OT relation described here is often overlooked and attention is paid exclusively to the y/x as in Airline Quality Ratings.5/0.2 0 2 4 6 8 10 12 14 16 Independent variable.

For example.considerations apply in the automotive industry when we compare companies like GM. If you have heard about apples and oranges comparisons. Perhaps. I have shown that Planck’s law can be re-derived and extended to many problems outside physics. Einstein’s uses a simplified version of this law. Thus. the mathematical property of y/x ratios and a straight line. Finally. Ford. with bloated labor costs. Planck actually derived the general expression for the average value of any property of interest that characterizes the behavior of a complex system. Nissan. which led to lost customers and the eventual filing of bankruptcy of the “old” GM on June 1. U can be interpreted as money if the same analysis (of deriving the average value of a system of N entities) is applied to the economy or a financial system. it is because of this nonzero c and what it does to the ratio y/x. Page | 60 . instead of apples and oranges. Rather surprisingly. how we use ratio to make different comparisons and make important decisions is of great fundamental importance to society as a whole. 2009. This is discussed in the articles listed under Ref. melons and pineapples hereon!  . The repeated unfavorable comparisons of the American automotive companies with their Japanese counterparts eventually led to their bad image of being inefficient. given as equation 1 here. The articles on the 2013 Forbes billionaires. by generalizing Planck’s ideas and Einstein’s ideas. we can also associate other meanings to this mathematical symbol and re-derive Planck’s law. But. and Chrysler (which used to operate huge automotive plants and produce a lot more cars and trucks) with their counterparts like Honda. provide a simple way of understanding this generalization. When he developed quantum physics. in his 1905 paper. the power-exponential law. Babe Ruth’s batting average. is a generalized statement of the famous blackbody radiation law derived by Max Planck in December 1900. describing the quantum nature of light radiation. and Toyota (with much lower production levels). [9]. and Airline Quality Rating. The symbol U denotes energy in physics. y = mxne-ax. which has been highlighted here. seems to have been completely overlooked.

376. and excise taxes on luxury goods. see Ref. starting with war of 1812 (also called the Second Revolutionary War. On January 1. etc. George Washington.Some Personal Closing Remarks Neither a lender nor a debtor be. did not hesitate to raise taxes on the rich to finance war time spending to keep the annual deficits (AD) under control. under President Andrew Jackson. [31]. like Lincoln. 463. The first income tax was instituted in 1861 to pay off the Civil War debts but this was challenged and repealed by 1872. the fiscal crisis of 1837. see the recent piece by Hogeland. American Presidents. see Ref. [29. Ref.) The income tax became a permanent source of government revenues only after a constitutional amendment (the 16th) was passed. However. The US founding fathers. see recent articles on the national debt under Ref. This new power of taxation was Page | 61 .30]) and James Madison (who was a staunch ally of Hamilton in the 1780s but later a political foe in the 1790s) saw the paying off the Revolutionary war debts as a means to unify the nation and consolidate the power of a strong national government that could levy taxes on all citizens in order to pay off this debt. goes an old saying. (Tariffs. Most the US national debt was incurred during times of War. [28]. in 1913. [32]. At the same time. All the early US Presidents were committed to paying off the national debt. and FDR. US Presidents did not hesitate to incur a debt at times of war and other crises. [9]. Indeed. tobacco. during the first term of the first President. this did not last very long and the debt started growing again due to the financial crisis of 1837 (not unlike what we experienced in 2008!). This early domestic debt was being held by private Americans who financed the revolutionary war. Woodrow Wilson. 1791. World War I and World War II. Furthermore.51. yes $0!) in January 8 1835. the Civil War. notably Alexander Hamilton (see Refs. the public debt was completely paid off and the US was debt free ($0 debt. firearms. the US national debt was $75. were the mean source of government revenues. liquor.

the better we will be off as a nation. to offset the war spending with increased taxes. during World War II. Hence. President Bush (junior) championed cutting of the top tax rates and Congress passed it. debt are NOT to be viewed in the same light. the economy will boom and we all get busy pursuing life.used effectively by President Wilson. Killing in a war (a just war) is not the same as murder. We have bestowed government with certain powers that we as individuals lack. fresh out of school and college. via cuts in social spending) may be misguided. click here).37. When the US entered its most recent wars.8 T (trillions.967. or $16. the push for “austerity” programs and the slashing of the debt (to the point of injury to the weakest citizens. 2013. to be morally objectionable. There are many on the right of the economic and debt debate who find the national debt. when it comes to dealing with budgets and finances. and happiness. as a people. Murder is morally objectionable. as of April 19. the latest figure available. so we must also confront one other moral objection – the high unemployment rates that have devastated the lives of millions: both the young (who. for the first time in US history. And. Personally speaking. the Iraq and Afghanistan wars. The same goes with economic and financial laws. The sooner we understand this. there is nothing more exhilarating than NOT being in debt. have granted the government to do exactly the same thing via capital punishment laws. It was still an unimaginably high 91% (by today’s standards) when President Kennedy took office on January 20. who raised the top income tax rates from 7% to 77% when the US entered World War I. to the penny. personal debt and national. but we.402. The annual budget deficit is still less than 10% of the GDP. have no work experience and so cannot Page | 62 . Herein lie the seeds of the current mushrooming of the national debt. 1961.781. Instead. liberty. The top tax rate was likewise raised to 94% by FDR. or public. like personal debt. However.405. as we see here. The current laissez-faire attitude to paying off the national debt seems to be a post-WWII phenomenon. no attempts were made. which is now nearly $16.

1961. or an earthquake. Cheers!  http://content. No advanced nation that willingly tolerates tens of millions of unemployed can ever pay off its debt or reduce its Debt/GDP ratios. Page | 63 . it cannot save the few who are rich. Kennedy.artofmanliness.” President John “If a free society cannot help the many who are poor. Jan 20. Inauguration. As a society we also have a moral obligation to rebuild their lives.find a job) and the 50+ year olds (who lost their jobs during the financial crisis and cannot find any since they have been out of the work force for too long). It is no different from rebuilding lives after a natural disaster like a hurricane. We now face the real possibility of losing a whole generation of Americans to a state of permanent unemployment. tornado.

Hence. and their performance during the period 2002-2012 (in the years before and after the US financial crisis of 2008. The Debt-GDP data for 30 leading modern economies have been reviewed in this context. The examples of Australia. A review of the Debt and GDP data for several countries (for the years 2002-2012) reveals a simple and remarkably linear law. it is important Page | 64 . it is important also to point out a much more fundamental problem with the general and widespread use of the Debt-GDP ratio in the discussion of economic performance. on economic growth). a new diagrammatic representation is suggested to assess the GDP growth relative to Debt growth. Vj Laxmanan • a minute ago Vj Laxmanan On Apr 26. 2013 on Apr 26.businessinsider. Further details may be found in the document just Read more: http://www. felt globally) are discussed here briefly to show that a high Debt-GDP ratio does NOT necessarily stifle economic growth. of the type y = hx + c between the GDP (x) and the Public Debt (y). depending on the numerical values of h and c (which can be either positive or negative).Vj Laxmanan Comment Submitted to Business Insider on April 26. Germany. exceeding 90%. The linear law means that the Debt/GDP ratio y/x = h + (c/x) can either increase or decrease as the GDP (x) increases. Finally. The post-2008 financial crisis data could not be analyzed by Reinhart-Rogoff. China. Ireland. http://www. see link given below. 7:41 AM said: Within the context of the recent repudiation of the Reinhart-Rogoff findings (regarding the stifling effect of a high Debt-GDP ratio. 7:41 AM said: (Submitted to The Atlantic) Within the context of the recent repudiation of the Reinhart-Rogoff findings (regarding the stifling effect of a high Debt-GDP ratio.scribd. GDP and Debt cannot be treated as independent quantities. exceeding 90%. on economic growth). which also takes into account the significance of the linear law relating the GDP and the debt. and Japan. Canada.

felt globally) are discussed here briefly to show that a high Debt-GDP ratio does NOT necessarily stifle economic growth.. http://www. A review of the Debt and GDP data for several countries (for the years 2002-2012) reveals a simple and remarkably linear law.also to point out a much more fundamental problem with the general and widespread use of the Debt-GDP ratio in the discussion of economic Also submitted here. see link given below. The post-2008 financial crisis data could not be analyzed by Reinhart-Rogoff.. GDP and Debt cannot be treated as independent http://www. The linear law means that the Debt/GDP ratio y/x = h + (c/x) can either increase or decrease as the GDP (x) increases. http://www. Canada. Brazil. and their performance during the period 2002-2012 (in the years before and after the US financial crisis of 2008. and Japan. 2013. Hence. Also at Washington Post. which also takes into account the significance of the linear law relating the GDP and the debt.theatlantic.washingtonpost.scribd. depending on the numerical values of h and c (which can be either positive or negative). The Debt-GDP data for 30 leading modern economies have been reviewed in this context. Page | 65 . Further details may be found in the document just uploaded. The examples of Australia. Ireland. China. of the type y = hx + c between the GDP (x) and the Public Debt (y). a new diagrammatic representation is suggested to assess the GDP growth relative to Debt growth. April 26.

Inside the offbeat economics department that debunked Reinhart-Rogoff Posted by Dylan Matthews on April 24. Reuters/Reuters . REUTERS/Eduardo Munoz Page | 66 .com/blogs/wonkblog/wp/2013/04/24/inside-the-offbeat-economicsdepartment-that-debunked-reinhart-rogoff/?wp_login_redirect=0 Thomas Herndon (left).Harvard Professor and Economist Kenneth Rogoff speaks during the Sohn Investment Conference in New York. May 16.washingtonpost. 2012. the UMass Amherst economist who debunked Carmen Reinhart (right) and Ken Rogoff. 2013 at 4:00 pm http://www.

(Cambridge Forum) http://www. (C-SPAN) http://www.33.png Page | 67 Pollin.washingtonpost. testifying before the Senate HELP committee.19PM.png Dube.

Hence. how much government debt is too much. GDP and Debt cannot be treated as independent quantities. they do not alter one of its main conclusions: High debt and low economic growth often go together. (Already many countries exceed or are approaching the 90 percent mark. Page | 68 . has assumed greater visibility because it involves the debate over deficit spending. It’s “austerity” versus “stimulus. But their work is being challenged by three other economists. who say that Reinhart and Rogoff made basic errors that invalidate their results.html An insistent question of our time is. Which is it? Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper (“Growth in a Time of Debt”) are embarrassing. The linear law means that the Debt/GDP ratio y/x = h + (c/x) can either increase or decrease as the GDP (x) increases. They suggested that debt exceeding 90 percent of a country’s economy (gross domestic product. This dispute. then the case for austerity seems stronger.” If debt exceeding 90 percent of GDP is hazardous. Attached following comment to above. Is there some debt level that becomes crushing as opposed to merely costly? The controversy over research by economists Carmen Reinhart and Kenneth Rogoff shows how explosive the issue is. (April 26. Samuelson Opinion Writer The Reinhart/Rogoff brawl By Robert J. on economic growth).com/opinions/robert-samuelson-the-reinhartrogoffbrawl/2013/04/24/6ed05be6-ad01-11e2-b6fd-ba6f5f26d70e_story. Published: April 24 http://www. of the type y = hx + c between the GDP (x) and the Public Debt (y). A review of the Debt and GDP data for several countries (for the years 2002-2012) reveals a simple and remarkably linear law. deficit spending remains a possible temporary spur.Robert J.washingtonpost. at 9:44 AM) Within the context of the recent repudiation of the Reinhart-Rogoff findings (regarding the stifling effect of a high Debt-GDP ratio. which would normally be confined to obscure scholarly journals.) If not. Samuelson. or GDP) corresponds to a sharp drop in economic growth. depending on the numerical values of h and c (which can be either positive or negative). it is important also to point out a much more fundamental problem with the general and widespread use of the Debt-GDP ratio in the discussion of economic performance. exceeding 90%. 2013.

gongloff@huffingtonpost. see link given below. Everybody Makes Mistakes Posted: 04/24/2013 5:11 pm EDT Page | 69 . China. Greg Mankiw On Reinhart-Rogoff: Also. a new diagrammatic representation is suggested to assess the GDP growth relative to Debt growth. and their performance during the period 2002-2012 (in the years before and after the US financial crisis of 2008.scribd. Further details may be found in the document just uploaded. which also takes into account the significance of the linear law relating the GDP and the debt.tcf. The examples of Australia. added comment here. The post-2008 financial crisis data could not be analyzed by Reinhart-Rogoff. 2013 @ 4:18 PM. Rortybomb Reinhart-Rogoff a Week Later: Why Does This Matter? on April 27.The Debt-GDP data for 30 leading modern economies have been reviewed in this context. felt globally) are discussed here briefly to show that a high Debt-GDP ratio does NOT necessarily stifle economic growth. Finally.nextnewdeal. http://www. Canada. April 26. Germany. and Japan. 2013 Mark Gongloff Become a fan mark. Also posted at http://www.

When Thomas Herndon. May 2013 http://news.html View Photo Reuters/Reuters . Page | 70 .com/student-took-eminent-economists-debt-issue-won095347790--business.Harvard Professor and Economist Kenneth Rogoff speaks during the Sohn Investment Conference in New York.http://www. 2012. spotted possible errors made by two eminent Harvard economists in an influential research he called his girlfriend over for a second look.html How a student took on eminent economists on debt issue .and won By Edward Krudy | Reuters – Thu.huffingtonpost. REUTERS/Eduardo Munoz By Edward Krudy NEW YORK (Reuters) . Apr 18. a student at the University of Massachusetts Amherst's doctoral program in economics.

2013. which formed the basis for a widely quoted 2010 study. it doesn't get much bigger than Reinhart and Rogoff.html by Matthew Yglesias. So I asked my girlfriend. Reinhart was a chief economist at investment bank Bear Stearns in the 1980s. am I just looking at this wrong? There has to be some other explanation. while Rogoff worked at the Federal Reserve. Slate Magazine Reinhart & Rogoff Call Backsies By Matthew Yglesias Posted Friday.As they pored over the spreadsheets Herndon had requested from Harvard's Carmen Reinhart and Kenneth Rogoff. Both have served at the International Monetary suasively_to_their_critics. "I was like." said Herndon. 'Am I seeing this wrong?'" His girlfriend. Kyla Walters. April 26. Thomas. at 8:11 AM Page | 71 . http://www. passing through Yale and MIT before landing at Harvard. they spotted what they believed were glaring errors. replied: "I don't think so.slate. whose work has had enormous influence in one of the biggest economic policy debates of the age. 28." In the world of economic luminaries. "I almost didn't believe my eyes when I saw just the basic spreadsheet error.

It's this tipping point theory that's been debunked." they write. but that doesn't mean that killing sheep leads to population growth. That was (allegedly) important because it's different from the existence of a mere statistical correlation and seems to suggest that there's something out there—what I've been calling macroeconomic dark matter—that causes indebted countries to grow slowly even in the absence of high interest rates. The crucial move in this op-ed. recall. Countries with a high ratio of sheep to people generally have low populations. "Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes. The question. instead of rescuring the tipping point theory they disavow it.Controversial economists Carmen Reinhart and Vincent Rogoff have a response to their critics in today's New York Times that ought to persuade nobody. is to obscure what it was that was allegedly interesting and allegedly important about the paper." Page | 72 . In fact. They say that "[o]ur view has always been that causality runs in both directions. Right? What was interesting about their paper was the apparent finding that a "tipping point" exists at the 90 percent ratio after which growth slows. The raw fact that there's a statistical correlation between debt:GDP being high and GDP growth being low is trivial and offers no policy guidance. as in other defenses of their "Growth in a Time of Debt" piece. as conservative politicians have suggested. was about the relationship between indebtedness (measured as the ratio of debt to GDP) and economic growth (measured as a change in GDP). and that there is no rule that applies across all times and places" and that their "consistent advice has been to avoid withdrawing fiscal stimulus too quickly. and nothing in their response restores it.

Case Western Reserve University (CWRU). NASA. D. energy in physics is like money in economics.. or snowflake. from the Indian Institute of Science. His expertise includes developing simple mathematical models to explain the behavior of complex systems.e. E.) in Mechanical Engineering from the University of Poona and his Master’s degree (M. Allied Chemical Corporate R & D. This led to a simple model to explain the growth of dendritic structures in both the groundbased experiments and in the space shuttle experiments. referred to here as the generalized power-exponential law. Laxmanan.) and Doctoral (Sc.g. Cambridge. More recently. yes. freezing of water. followed by a Master’s (S.. freezing of all commercial metals and alloys. The mathematical law deduced by Planck. he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree. The author obtained his Bachelor’s degree (B. might Page | 73 . has co-authored two books and published several scientific papers in leading peer-reviewed international journals. he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). While at NASA and CWRU.) degrees in Materials Engineering from the Massachusetts Institute of Technology. MA. He holds four patents in materials processing. production of snowflakes!). E. each with the fixed quantum of energy conceived by Planck). USA.About the author V. MI). and. This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money. He then spent his entire professional career at leading US research institutions (MIT. and General Motors Research and Development Center in Warren.). D. like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e. Einstein applied Planck’s ideas to describe the photoelectric effect (by treating light as being composed of particles called photons. also in Mechanical Engineering. i. now part of Honeywell. Bangalore. M. Sc.

who was Chairman of Corporate Research Review Committee. during my professional career.actually have many applications far beyond blackbody radiation studies where it was first conceived. It appears that financial and economic systems can be modeled using a similar approach. Robert Schrieffer (1972 Physics Nobel Prize). Page | 74 . 1986) and second at GM Research Labs to Prof. Einstein’s photoelectric law is a simple linear law and was deduced from Planck’s non-linear law for describing blackbody radiation. business. I also twice had the opportunity and great honor to make presentations to two Nobel laureates: first at NASA to Prof. appointed by GM corporate management. Cover page of AirTran 2000 Annual Report Can you see that plane flying above the tall tree tops that make a nearly perfect circle? It requires a great deal of imagination to see and to photograph it. who was the Chairman of the Schrieffer Committee appointed to review NASA’s space flight experiments (following the loss of the space shuttle Challenger on January 28. Robert Solow (1987 Nobel Prize in economics). economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton. Finally. Finance.