Once again: this business with Excel mistakes seems like a red herring. The bigger problem is that the Reinhart-Rogoff result never made much sense to begin with. Correlation isn't causation; in fact, there's a strong intuitive case that it's the reverse with debt and growth.
Yup, but the Excel error is the soundbite. Anyone can understand it and it makes the authors look ridiculous, which is so much more potent than just being wrong, especially if what you're wrong about is something abstruse that in the end will only get reported as "economists disagree".
I've often wondered about this aspect of political discourse. It's not rational, it's symbolic. Yet most of the time when a symbolic soundbite takes off, even though it's wrong or misleading per se, there's still some poetic justice to it. That is, it's rare that such a soundbite is completely unfair; usually it turns out to be a metonym for an arguably legitimate criticism. This is a case of that.
Both situations are intuitive. High debt causes high servicing of debt causes inefficient use of private market resources paid in taxes.
Additionally, slow growth causes lower govt revenue causes less incurring of debt to make up the shortfall in tax base.
Debt and growth are both inputs and outputs that are codependent. The degree to which they impact the overall financial picture depends HEAVILY upon the opportunity cost of the servicing of the incurred debt.
For bonus, consider what will happen to heavily indebted countries when interest rates begin to rise. Servicing of debt will become more difficult leading to a decrease in our ability to grow the economy, leading to more difficulty in servicing the debt, and on and on.
The original paper doesn't make any claims about causation at all, does it? I haven't read every single word, but the Abstract certainly doesn't say that. The closest the paper says is that high debt and low growth are "associated."
