Professor Rogoff has written an unusually angry letter to the New York Review of Books in response to Trevor Jackson’s critical review of his recent book, Our Dollar, Your Problem. It seems that someone never had a bad review before. Rogoff seems particularly offended that the reviewer did not sufficiently appreciate the success of his book or its favorable reception elsewhere (boo hoo).
But the substance matters more. Rogoff returns to the old argument that very high legacy debt weighs on growth. He acknowledges that the infamous 2010 Reinhart-Rogoff paper contained “one mistake,” but insists that the error did not affect the later and more complete work, which reached the same conclusion. He also argues that high debt may limit a government’s capacity to respond to financial crises, pandemics, and wars. Finally, he complains that progressive economists who once believed in a fiscal “free lunch” are now walking back their views because of the post-pandemic rise in inflation and interest rates.
The first problem is that the 2010 result was not a trivial early-stage slip. The Herndon, Ash, and Pollin replication found selective exclusion of available data, coding errors, and an inappropriate weighting procedure. Correcting those problems changed the alleged result dramatically. For the postwar sample, countries with debt ratios above 90 percent of GDP had averaged growth of 2.2 percent, rather than the minus 0.1 percent reported by Reinhart and Rogoff. More importantly, there was no robust historical cliff at the supposedly fateful 90 percent threshold.
That mattered because the paper was not merely an academic exercise. It became a central intellectual prop for post-2008 austerity. It was cited by US and European officials eager to defend smaller fiscal packages, and to present fiscal retrenchment as a matter of arithmetic rather than of class politics. The notion was that public debt above a certain level produces stagnation, so governments must tighten their belts even in the aftermath of a financial crash. That was always bad economics and worse policy.
Even the IMF later concluded that there was no magic threshold. Growth rates (that reduce the burden of debt), interest rates (that determine the growth of previous debt), currency denomination (never discussed), and the political limits of state action (often related to class issues) are the real issues. A country that issues debt in its own currency and has a central bank willing to act as the fiscal agent of the Treasury is in a radically different position from one that borrows in foreign currency or, as in the eurozone, lacks a genuine lender of last resort and unified fiscal policy.
Note that Rogoff does not discuss the distinction between debt in domestic and foreign currency. The relevant issue is not a universal public debt-to-GDP ratio in domestic currency that slows down growth. The issue is, for most countries, whether they have an external constraint and need debt in foreign currency. Hegemonic countries with the key currency don't face that constraint.
This is hardly a novel insight. Britain’s eighteenth-century experience should be enough to make anyone wary of universal debt thresholds. British public debt rose through the century and reached roughly 260 percent of GDP after the Napoleonic Wars. Yet that debt did not bankrupt Britain. It happened as the Industrial Revolution was underway (perhaps a coincidence). It financed war, helped sustain a powerful fiscal-military state, and formed part of the historical conditions under which Britain industrialized and became the dominant global power. The question, as I argued years ago, is not the size of debt in the abstract, but how it is used and how it is funded. Deficits that create employment, build infrastructure, expand public services, and increase productive capacity are not equivalent to deficits that rescue banks, subsidize rentiers, or finance tax cuts for the wealthy. Functional finance begins from that elementary point.
Rogoff’s invocation of the post-pandemic inflation episode is revealing. The issue is whether inflation and higher interest rates prove that the return of fiscal restraint was necessary, as he seems to think. To be clear; they do not. The pandemic inflation was shaped by supply disruptions, energy shocks, and bottlenecks. It was not a straightforward result of excess demand generated by government deficits, even if government spending did maintain demand and allowed for a fast recovery (that was the point, BTW). What Rogoff’s language reveals is the return of the New Consensus. In this view, inflation is presumed to the result of excessive demand, and higher rates restore discipline. In this context, fiscal policy must once again be constrained by fear of debt.
That was precisely the framework that made austerity appear reasonable after the Global Financial Crisis and the European Debt Crisis. The return of inflation anxiety now performs a similar ideological function. It allows the old argument to be revived in a new form. For Rogoff and the defenders of the old New Consensus, governments spent too much, public debt is dangerous, and the space for public action must therefore be narrowed. The danger is not simply that this misreads the causes of recent inflation. It is that it prepares the ground for the next round of fiscal restraint when public investment, housing, infrastructure, climate policy, and social protection are badly needed.
There is one final issue. From Rogoff’s letter alone (since I haven't read this great book that is immensely popular and everyone liked but Mr. Jackson), his argument about the dollar appears problematic. He emphasizes the forces that might weaken dollar dominance, including the weaponization of finance, fiscal policy, and threats to Federal Reserve independence. A confidence argument. The overuse of sanctions, to the extent that it leads to the search for alternatives, might be a real source of pressure, the others are more doubtful.
What he does not say is that there are also powerful reasons to expect continuity of dollar hegemony. The dollar is not sustained by confidence in US market-oriented policies and rule of law abiding institutions, but by deep Treasury markets, a global payment infrastructure, and its correspondent banking and legal jurisdiction, which, in turn, rest upon American military power. The dollar system is resilient, as I noted recently, precisely because it is embedded in a broader fiscal-military architecture. That does not make it eternal. It does mean that predictions of imminent decline are exaggerated. Predicting catastrophe might sell books, but is often poor scholarship.
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