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

An MIT Non-Economists 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
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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)

2009
10
12
14
16
18
20
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 Herndons 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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A review of the readily available Debt-GDP data for several leading economies, see the global debt clock, Ref. [15], at the website of The Economist, however, reveals a remarkably simple and linear relation, of the type y = hx + c, between the GDP x and the debt y; see Figures A and B which consider the multi-year data for China and Germany. The data for ten countries, deepest in debt, may be found in Table B. The Nominal GDP for 2011 (rather than Real GDP) is used here. The linear law is again observed, see Figure C.
Table B: Ten Countries Deepest in Debt

Nominal GDP Government Debt/GDP Debt/GDP (2011), x Debt, y 100 (y/x) (as quoted) ($, trillions) ($, trillions) UK 2.46 1.99 80.9 80.9 Germany 3.56 2.79 78.4 81.8 France 2.76 2.26 81.9 85.4 USA 15.13 12.8 84.6 85.5 Belgium 0.514 0.479 93.2 97.2 Portugal 0.239 0.257 107.5 101.6 Ireland 0.217 0.225 103.7 108.1 Italy 2.2 2.54 115.5 120.5 Greece 0.303 0.489 161.4 168.2 Japan 5.88 13.7 233.0 233.1 Data source: http://www.huffingtonpost.com/2012/02/15/countries-indebt_n_1278711.html Compiled by 24/7 Wall Street. The x-y graph can be shown to be linear, y = 0.837x + 0.102, with r2 = 0.996 (see Refs. [17,18]) and the Debt/GDP ratio y/x = 0.837 + 0.102/x decreasing with increasing GDP, x. The implications of this linear law, which seems to have escaped the attention of economists to date, and the nonzero intercept c, is discussed briefly in 3. Herndons baseball analogy, see Ref. [3], is also discussed in this context. The GDP-Debt relations are presented in 4 and 5. The Debt-GDP data for 30 countries is considered in 6. Finally, in 7, we will consider the relation between the Debt/GDP ratio and GDP growth for several countries. Country
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1.40
1.20
China (2002-2012)
1.00 0.80 0.60 0.40 0.20 0.00 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
y = hx + c = 0.124x + 0.218 r2 = 0.983 Type II Behavior

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). A more careful examination of the (x, y) data indicates a decreasing slope between 2002 to 2007 and an acceleration to a higher fixed slope after the financial crisis of 2008. However, overall, the data can be described quite well by the linear law. The best-fit line through the data has the equation y = hx + c = 0.124x + 0.218 with a positive slope (h > 0) and a positive intercept (c > 0). Hence, the Debt/GDP ratio y/x = h + (c/x) = 0.124 + (0.218/x). The positive intercept c means that the Debt/GDP ratio will keep on decreasing as the GDP increases; see the dashed lines joining the (x, y) pair to the origin (0,0). The slope of the dashed line, or rays joining a point on the graph to the origin is equal to the ratio y/x. The limiting value of the ratio y/x = Debt/GDP ratio is the slope h. The focus on the Debt/GDP (y/x) ratio creates the perception of China must be doing something very right with its fiscal policies, 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). When the GDP increases by
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a fixed amount x, statistically speaking, the debt always increases by the same fixed amount y = hx. The rate of increase of debt y with respect to the GDP x is the slope of the graph. This rate is a constant. This is what we learn in our elementary calculus courses. Other examples of the same type of behavior are the distance-time graph for a vehicle moving at a fixed speed, or the speed-time graph for a vehicle having a constant acceleration, or the heating curve for a body being heated at a fixed rate.
5.00
4.00
y = hx + c = h(x x0) = 0.979x 0.825 = 0.979(x 0.843) r2 = 0.863 Type I Behavior
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Germany (2002-2012)
0.00 0.00
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Figure B: The multi-year data for Germany (2002-2012) also reveals a linear law. A careful examination of the (x, 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. However, overall, the data can be described quite well by the linear law. The best-fit line has the equation y = 0.979x 0.825 with a positive slope (h > 0) and a negative intercept (c < 0). Hence, the Debt/GDP ratio y/x = h + (c/x) = 0.979 - (0.825/x). The negative intercept c means that the Debt/GDP ratio will
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keep on increasing as the GDP increases; see the dashed lines joining the (x, y) pair to the origin (0,0). This leads to the opposite perception of an economy burdened with debt.
4.00
3.00
2.00
1.00
y = hx + c = 0.836x + 0.102 r2 = 0.996 Multi-country (2011)

1.00 2.00 3.00 4.00 5.00
0.00 0.00

Figure C: The multi-country, single year (2011) data, for ten countries deeply in debt, also reveals a linear law. Only the low GDP, low debt, countries (GDP and debt under $5 trillion) are considered here to illustrate the linear relation. The data for Japan (high debt midrange GDP) and USA (high debt, high GDP) fall outside the scale of this graph. For the purposes of the present discussion, the GDP growth rate is taken as x/x, the percentage change in the denominator x (the GDP) of the Debt/GDP ratio, between two consecutive periods of interest, Refs. [19-24]. Unlike the historical data considered by RR, going back to some 200 years (for the US), we will consider only the years 2002-2012, i.e., the most recent period, before and after the financial crisis in the US in 2008 whose effects
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were felt globally. Indeed, the large mass of historical data reviewed by RR is simply irrelevant to a discussion of the current global situation with high unemployment rates, in the US and worldwide. The instantaneous speed of a vehicle, rather than its historical speed (the average speed since the trip began, or its average speed in many tens or hundreds of trips in the past), determines its future position. The same considerations apply to the Debt and the GDP data if one is looking here for solutions to the current global economic crisis. Please note that I am not a professional economist. I have Masters and doctoral degrees in Materials Engineering from MIT; the title is just meant to be an attention grabber. I did take the basic economics courses and even had the honor of exchanging a few words with the Nobel Prize winning economists on MITs Economics department faculty. All my professional life was spent in the R & D environment, 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. And so it is that, as an R & D professional at the old General Motors Research Labs, I discovered, quite accidentally, in the summer of 1998, an interesting mathematical property of ratios, such as the Debt/GDP ratio, the topic of the present article. Since academic research has now taken center stage in one of the great national economic debates of our times, please allow me now to add here another - not so trivial - academic reminder. If a straight line does NOT pass through the origin, 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.
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3. An Important but Overlooked Mathematical Property of a Straight line

The historic UAW-GM strike of 1998 brought all of GMs productions to a grinding halt. Because of the ripple effects of the strike, not a single car or truck could be produced by the worlds largest automaker. Even one single missing part means a car/truck cannot be assembled. The ratio that I was then interested in was the labor productivity, y/x, in GM assembly plants and other automotive plants producing engines, stampings, etc. Here x is the number of vehicles produced and y the labor hours. The ratio y/x has units of Hours per Vehicle (HPV). GM, and the two other US automakers, Ford and Chrysler, were considered to be horribly inefficient compared to their Japanese counterparts Toyota, Honda, and Nissan. The transplants, i.e., the plants owned by the Japanese but which employed American labor, were significantly more efficient, with significantly lower values of the ratio HPV. Indeed, the situation with these automotive plants was very similar to that discussed by Herndon in Ref. [3], using the baseball analogy. If the (x, 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, 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 = 0.200. The second has a PERFECT batting average of y/x = 1/1 = 1.000. Does this mean the second player is better than the first? The answer is a clear NO. The number of At Bats, the denominator x of the batting average ratio is not comparable. We cannot draw any performance related conclusions until we observe both players over nearly comparable number of At Bats, x. If these two players belong to the same team, how is the teams batting average determined? What averaging technique can be used to find the teams BA? The same questions must be addressed when we consider the Debt/GDP ratio for different countries, and for different time periods.
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In his April 22 discussion, Herndon has pointed out that Reinhart-Rogoff averaging is equivalent to simply taking the average of the two batting averages, and using (0.200 + 1.000)/2 = 0.600 as the average for the two players. In other words, they are giving equal weight to both the y/x ratios. This is being called the unconventional averaging technique of RR. With reference to the sample table on page 2, can we take the average GDP growth (at each debt level) of the three countries here, or for all the 20 countries in the original RR paper, 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. We know instinctively that we cannot simply average the two averages when faced with the batting stats (100, 20) and (1, 1) for two players. 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. The production levels at the Japanese transplants were widely different from their American counterparts. Can we still make the comparison using the y/x ratio? The baseball batting average analogy is very apt in this context. While I was trying to unravel the GM inefficiency puzzle, I realized that if a straight line does NOT pass through the origin, 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. The nonzero intercept c has some interesting consequences, as discussed, for example, in a recent article on the quality rating for US airlines, which is exactly analogous to the problem of ranking the automotive plants of different automakers, see Refs. [10-14]. The mathematical equation of such as straight line is y = hx + c. Hence, the ratio y/x = h + (c/x). The nonzero c means that the ratio y/x is not a constant, even if all our empirical (x, y) observations fall on a PERFECT straight line. Everyone, with whom I have discussed this, over the years, has always agreed that the ratio y/x is NOT a constant, if the straight
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line does not pass the origin. However, quite surprisingly, its deeper consequences have largely been overlooked. What are the implications of this property if our x-y observations suggest a simple linear law, of the type y = hx + c, between two variables x and y? Can we use the y/x ratio to evaluate performance and develop quality ratings, if the two quantities, x and y that enter into the ratio, are related by either a linear law (or a nonlinear law, in the more general case)? Very briefly, three distinct types of straight lines can be envisioned. Type I: Positive slope, negative intercept (h > 0, c < 0). As the independent variable x increases both the dependent variable y as well as the ratio y/x increase. The limiting value of the ratio y/x is the slope h of the straight line. The Canadian Debt-GDP figures, Table 1, after the financial crisis of 2008 provide an example of Type I behavior. This is illustrated in Figures 1 and 2. Type II: Positive slope, positive intercept (h > 0, c > 0). As x increases y increases but the ratio y/x decreases. Again, the limiting value of the ratio y/x is the slope h of the straight line. The recent Canadian Debt-GDP figures, BEFORE the 2008 financial crisis, provide an example of this Type II behavior, see Figures 1 and 3. Type III: Negative slope, positive intercept (h < 0, c > 0). As x increases both y and the ratio y/x decrease. Again, the limiting value of the ratio y/x is the slope h of the straight line. The recent Debt-GDP data for Ireland (increasing debt with decreasing GDP) is an example of Type III behavior, see Table 2. Many examples of Type III behavior can also be found when we analyze the financial data (profits and revenues) for various companies. All three cases described above and their inverses are observed when we analyze the (x, y) observations on many different systems. The term inverse is used here to refer to the case of decreasing x instead of increasing x, e.g. when a positive slope h is observed with a simultaneous decrease in the values of both x and y. Several articles describing these findings can be found on this website; see bibliography list, Ref. [9].
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And, like Herndon, I have also discussed baseball batting statistics in Refs. [13,14] 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. Generic examples of these three types of behavior, without any reference to the Debt-GDP problem, have been included in Appendix 1 to call attention to this fundamental property of a straight line and the behavior of y/x ratios. If x is revenues and y is profits, the ratio y/x, is the profit margin, by definition. We expect the profits y to increase as revenues x increase. A high profit margin, i.e., a high value of the ratio y/x, is, desirable and is used to evaluate the financial performance of various companies. The same cannot be said about the Debt/GDP ratio. Is a low Debt/GDP ratio desirable? Does a high Debt/GDP ratio actually stifle economic growth, 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. While several counterpoints have been made to repudiate RR, the way we use the Debt/GDP ratio has not yet been challenged. Because of the mathematical property of a straight line, just noted, and how the y/x ratio varies even on a perfect straight line, 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. We will now pursue this point in the remainder of this article. Indeed, with some reflection, it will become clear that the linear law y = hx + c, as discussed here, 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 recent discussion of the Airline Quality Rating, where we consider the percent On-Time arrivals for different airlines, is another example of the same weighting dilemma. To quote Herndon from Ref. [3].
Unconventional is appropriate in describing their averaging technique. To use a baseball analogy, suppose we had a team with two players, and we want to find the teams overall batting average. The first player has 100 at bats, is successful one-fifth of the time, and therefore has a .200 batting average. The second player has a single at bat, but gets on base in this one at-bat, and so has a perfect 1.000. If we use the Reinhart-Rogoff method, we 1
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would equally weight the .200 and 1.000 batting averages, and thus find that the team has an overall .600 batting average. If we used conventional methods of calculating the teams batting average, it would more or less remain .200. The underlying problem is not that their method is necessarily wrong, but that it is particularly sensitive to outliers. This contributed to the perfect storm of errors whose combined effect caused the large decline in average GDP. If the only problem was the weighting, this would not have been sufficient to cause a drastic decline in average GDP growth. However, 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. There is nothing inherently wrong with their weighting system. However it is unusual and it is their obligation to be open and clear in explaining why they used this unusual methodology. And, Matthew OBrien [5], asks, in his piece in The Atlantic (April 16, 2013), But is Reinhart and Rogoff's methodology even the right one? That's not clear. Because they just average the country averages, Reinhart and Rogoff weigh each equally, regardless of whether they had one year of bad growth or many years of decent growth. That's not necessarily wrong, but if you average all the years, rather than all the countries, you get 2.2 percent growth, versus the -0.1 percent Reinhart and Rogoff reported. The Herndon, Ash, and Pollin paper doesn't change the big picture all that much. Growth does tend to slow down when debt is high, just not as much as Reinhart and Rogoff claimed. But whether it slows down to 2.2 percent or -0.1 percent doesn't really matter. What matters is whether it's the higher debt causing the slower growth, whatever that may be. There's still no evidence of that, and never has been.
This perfect storm can be understood more easily by considering the Debt-GDP relation and the simple linear law.
4. The Linear Debt-GDP law (2002-2012)

In this section, we will consider the GDP and the Debt data for Australia, Canada and Ireland, for the years 2002 to 2012. The data was obtained, quite readily, from the website of The Economist, see Ref. [15].
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Table 1: The Debt and GDP data for Canada (2002-2012)

GDP, x Debt, y Debt/GDP, y/x $, Trillions $ Trillions (converted to %) 2002 0.705 0.579 82.1 2003 0.790 0.627 79.4 2004 0.977 0.737 75.4 2005 1.104 0.798 72.3 2006 1.199 0.854 71.2 2007 1.331 0.921 69.2 2008 1.473 0.9999 67.9 2009 1.358 1.016 74.8 2010 1.510 1.267 83.9 2011 1.641 1.408 85.8 2012 1.710 1.491 87.2 Data Source: The Economist, The Global Debt Clock (click here) Year
Table 2: The Debt and GDP data for Ireland (2002-2012)

GDP, x Debt, y Debt/GDP, y/x $, Trillions $ Trillions (converted to %) 2002 0.114 0.039 34.2 2003 0.149 0.047 31.5 2004 0.185 0.056 30.3 2005 0.202 0.058 28.7 2006 0.205 0.054 26.4 2007 0.247 0.061 24.7 2008 0.267 0.082 30.7 2009 0.244 0.123 50.5 2010 0.222 0.163 73.4 2011 0.209 0.201 96.4 2012 0.206 0.223 108.4 Data Source: The Economist, The Global Debt Clock (click here, see example below). Notice the rise in the Debt/GDP ratio (or percent) in the last column from a low of 24.7% to more than 100% between 2007 and 2012 and the falling values of the same ratio between 2002 and 2007. Year
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If we examine the Canadian data in Table 1, we find that as the GDP increased between 2002 and 2008, the debt also increased but the Debt/GDP ratio (converted to a percentage) was decreasing. This is Type II behavior. Following the financial crisis in the USA in 2008, we find the Canadian GDP shrinking very slightly in 2009 and then rising again. The debt remained virtually unchanged between 2008 and 2009 and then started rising again. However, in this most recent period, we find that the Debt/GDP ratio is increasing. This is Type I behavior. With Ireland, we see a transition from Type II behavior, before the financial crisis of 2008 to a Type III behavior following the crisis.
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120
Post-2008 Financial Crisis

100
Debt/GDP, y/x [%]
80
60
Pre-2008 Financial Crisis

40
20
0 0.00
0.40
0.80
1.20
1.60
2.00
2.40

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, before and after the financial crisis of 2008. The falling and rising hyperbolas in Figure 1 illustrate this trend in the Debt/GDP ratio. The corresponding linear relations between the GDP and the Debt are illustrated in Figures 2 and 3. The composite graph GDP-Debt graph is illustrated in Figure 4. The numerical values of the constants h and c were deduced using linear regression analysis (method of least squares), see Refs. [17,18], 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. The Type III behavior, observed with Ireland, is illustrated in Figure 5.
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2008
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Post-2008 Financial Crisis

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Figure 2: The Canadian GDP-Debt data for 2008-2012 reveals a remarkable linear relation (with 2008 falling below the line). The constants h and c can be fixed using the method of least squares, see Refs. [17,18]. The linear law y = hx + c leads to the hyperbolic laws describing the behavior of the Debt/GDP ratio. The negative intercept c = - 0.78 means a positive intercept x0 = 0.584. As the GDP increases, the debt also increases but a fixed rate h given by the slope of the line. Also, since c < 0, the maximum value of the Debt/GDP ratio equals the slope h. The opposite trends are seen in the pre-2008 period with c > 0, see Figure 3. It should be noted that only a strong positive correlation exists between the GDP and the debt. No cause and effect relation can be attributed between the GDP and debt, or vice versa. 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. The same trends are revealed if Debt is plotted on the x-axis and GDP on the y-axis, as illustrated later in Figures 6 and 7 for Australia.
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1.20
Pre-2008 Financial Crisis

1.00
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y = hx + c = h(x x0) = 0.546x + 0.197 r2 = 0.9995 Type II Behavior
0.00 0.00
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1.20
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Figure 3: The pre-financial crisis GDP-Debt data for Canada, for 2002-2008, obtained from The Economist. The linear law y = hx + c = 0.546 x + 0.197, with a positive slope (h > 0) and positive intercept (c > 0). As the GDP increases, the debt also increases. However, the rate of growth of the debt, in relation to the GDP, given by the slope h = y/x, was significantly lower in this earlier period (0.546 versus 1.335 or about 40%). 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. Whether the GDP increases because of the increased debt, or vice versa (uncontrolled debt increase due to the increasing GDP), is essentially a matter of opinion and intense debate and is also at the root of the criticisms of the Reinhart-Rogoff findings. Nonetheless, the expressions for GDP growth rate which follow, as given by equations 1 to 3 in the next section, reveal the importance of the nonzero intercept c, as discussed in many other articles discussing economic and financial data, see Ref. [9].
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2.00
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Canada (2002-2012) 2009
1.20
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2008
0.40
0.00 0.00
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Figure 4: The pre-financial crisis GDP-Debt data for Canada, for 2002-2008, obtained from The Economist. Type II linear law y = hx + c = 0.546 x + 0.197.
0.35
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0.25 0.20 0.15 0.10
Ireland (2002-2012) 2012 8 2008
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Figure 5: The GDP-Debt diagram for Ireland for the period 2002-2012. A change from Type II behavior (h > 0, c > 0, y =0.233x + 0.011, r2 = 0.849) to an inverse Type III behavior (h < 0 and c > 0, y = -2.183x + 0.659, r2 = 0.972) is observed before and after 2008, the year of the financial crisis in the US, which was felt globally. 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). Regardless of causations, i.e., whether one believes that debt increases because of the increasing GDP, or that GDP increases because of the increased public debt incurred, the linear relation between these two quantities holds, as we see from the recent data for Australia, for the years 2002-2012, plotted in Figure 6, with GDP as the independent variable, and in Figure 7, with the debt as the independent variable (symbols x and y are NOT interchanged).
0.6
0.5
Australia (2002-2012)
0.4
0.3
0.2
0.1
0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

Figure 6: The GDP-Debt diagram for Australia for the period 2002-2012. A distinct change is observed in the trends before and after 2008, the year of the financial crisis in the US, which was felt globally.
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Pre-2008, Type II behavior with y = 0.094x + 0.05, r2 = 0.978 and post-2008, Type I behavior with y = 0.472 x 0.31 with r2 = 0.993.
2.00
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1.20
0.80
0.40
0.00 0.00
0.10
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0.50

Figure 7: The Debt-GDP diagram for Australia (2002-2012) with Debt plotted on the horizontal axis and GDP on the vertical axis. Pre-2008, x = 10.39y 0.507 with r2 = 0.978 and post-2008, x = 2.104y + 0.661, with r2 = 0.993.
5. GDP Growth Rate and the Linear Debt-GDP law

The linear law means that when the GDP increases by x, the debt increases by y = hx. 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, see Refs. [19-24]. GDP growth rate = x/x = y/hx = y/(y c) = (y/y) /[1 (c/y)] ..(1) Or, GDP growth rate = x/x = k (y/y) where, k = 1/[1 (c/y) ..(2) ..(3)
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Table 3: The GDP growth rate for Canada (2002-2012)

Year GDP, x $, Trillions GDP change, x $ Trillions GDP growth rate, x/x (Converted to %)
2002 0.705 2003 0.790 0.048 8.29 2004 0.977 0.11 17.54 2005 1.104 0.061 8.28 2006 1.199 0.056 7.02 2007 1.331 0.067 7.85 2008 1.473 0.079 8.57 2009 1.358 0.016 1.61 2010 1.510 0.251 24.7 2011 1.641 0.141 11.13 2012 1.710 0.083 5.89 Data Source: The Economist, 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. The GDP growth rate values (x/x) deduced for Canada are given in Table 3. A nonlinearity in the growth rate, 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.
6. 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, Herndon, Ash, and Pollin [2]. This data has been compiled in Table 4 and was obtained from the Global debt clock at the website of The Economist. The US (high debt and high GDP), Japan (highest debt, high GDP), and China (lowest debt, high GDP) are the exceptions, as evident from the GDP-Debt diagram in Figure 8. Excluding these three countries, and considering only
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countries with a GDP of less than $4 T (trillion) reveals a general upward trend, with debt increasing with increasing GDP. This is illustrated in Figure 9.
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, x $, Trillions
1.463 0.396 0.486 2.567 1.798 1.888 9.563 0.311 0.254 2.541 3.322 0.277 2.402 0.192 0.230 2.086 5.901 0.339 1.222 0.799 0.155 0.459 0.223 2.112 0.316 0.470 1.410 0.513 2.597 0.151 15.801 16.330
Debt, y $, Trillions
0.398 0.296 0.484 1.399 1.557 1.624 1.597 0.138 0.124 2.414 2.794 0.445 1.242 0.246 0.168 2.509 12.71 0.206 0.441 0.5296 0.058 0.263 0.259 0.1732 0.3 0.182 0.984 0.191 2.498 0.064 12.009 13.456
Debt/GDP (y/x) (Converted to %)

27.2 74.8 99.5 54.5 86.6 86 16.7 44.4 48.8 95 84.1 160.6 51.7 128.1 73.2 120.3 215.4 60.8 36.1 66.3 37.4 57.3 116.3 8.2 94.8 38.7 69.8 37.2 96.2 42.4 76 82.4
Data source: The Economist, see Global debt clock, http://www.economist.com/content/global_debt_clock Again, regardless of what is the cause and what is the effect, we see a strong positive correlation between increasing GDP and increasing debt, at least for
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the current global situation in 2012. While historical trends give us deeper insights, it is the current trends that are most relevant and have to deal with. China, and also Russia, have very low debt levels, relative to their GDP, while Japan and the USA are the exceptions.
16.00
14.00
12.00 10.00
8.00
6.00 4.00 2.00 0.00 0.00
2.00
4.00
6.00
8.00 10.00 12.00 14.00 16.00 18.00 20.00

Figure 8: Graphical representation of the GDP-Debt data, for 2012, for the 30 countries listed in Table 3. Excluding these three countries, and focusing on the 27 countries with GDP of less than $4 T (trillion), we can start analyzing the data and deduce the following quantitative results. a) The (x, y) pairs for USA and New Zealand provide two extremes. The equation of the line joining these two points is y = 0.828x 0.0705 = 0.828(x 0.085), i.e., a Type I line with h > 0 and c < 0.
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b) Likewise, the Germany and New Zealand (x, y) pairs are joined by another Type I line, y = 0.864x 0.076 = 0.864 (x 0.088). c) Linear regression analysis (after eliminating USA, China, and Japan for reasons mentioned) yields y = 0.792x 0.095 = 0.792 (x 0.120) with a linear regression co-efficient r2 = 0.734.
3.50 3.00
Italy y = hx + c = h(x x0) = 0.792x - 0.095 r2 = 0.734
Germany
2.50 2.00 1.50 1.00 0.50 0.00 -0.50 0.00
Russia
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00

Figure 9: Graphical representation of the GDP-Debt data, for 2012, for the 25 countries listed in Table 3 with GDP of less than $4 T (trillion). Note that Israel and Ukraine were added to the list of 30 countries after this regression analysis was completed. The results are not affected.
Now, let us consider an extrapolation of the regression line deduced for the countries with the smaller GDP. 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, after one allows
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for the size effect, which means the magnitude of x, the GDP in this relation. This is illustrated in Figure 10.
18 16 14
Japan
12 10 8 6 4 2 0 0 -2 2 4 6 8 10 12 14 16 18
USA
China
20 22

Figure 10: Extrapolation of the best-fit line through the data for the countries with smaller GDP to the GDP levels of the US. The high debt held by the US is seen to be consistent with the debt levels for the smaller countries, after (statistically) accounting for the higher GDP levels.
Finally, the (statistically) rising values of the Debt-GDP ratio is illustrated in Figure 11a, although with the statistically deduced rising hyperbolic law (implied by the linear law illustrated in Figures 9 and 10). Although a falling trend in the Deb-GDP ratio (or percent) with increasing GDP, is also obvious from an examination of Figure 11a, the linear regression analysis suggests the rising trend.
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A falling trend is suggested by the regression analysis for the data compiled in Table B earlier for the 10 countries deepest in debt. This is illustrated by the graph prepared in Figure 11b.
200 180 160
Debt/GDP, y/x [%]
140 120 100 80 60 40 20 0 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Figure 11a: The (statistically deduced) rising trend in the Debt-GDP ratio, with increasing GDP for 27 of the 30 countries considered in Table 4.
7. 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, in 2008) by considering the examples of few advanced and emerging economies, notably, Australia, Brazil, Canada, and Japan using the familiar performance of the GDP growth rate x/x and the Debt-GDP ratio y/x. The mathematical relation
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between these two quantities, implied by the linear law, y = hx + c, was presented earlier in 5 (GDP Growth rate and the linear law).
240 220 200
Japan
Debt/GDP, y/x [%]
180 160 140 120 100 80 60 40 20
0
0 2 4 6 8 10 12 14 16 18 20

Figure 11b: The (statistically deduced) falling trend in the Debt-GDP ratio for 10 countries deepest in debt, see data in Table B. The (x, 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. All through the 21st century, the Debt-GDP ratio for Japan has remained well above 100%, as illustrated in Figure 12. However, the Japanese GDP has NOT stopped growing and increased from $3.941 T (trillion) in 2002 to $5.897 T in 2012 and increase of $1.957 T in the eleven year period, see Figure 13.
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Even the significance of the terms growth and growth rate as applied to the economy, with GDP being a measure of this performance, must thus be carefully reconsidered. As noted already, an investigation of the relation between the GDP growth rate, 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. In fact, as we will see here, this measure of economic performance leads to a confusing and, perhaps, also misleading, results when we consider the performance of several countries, besides Japan.
250
Debt/GDP, y/x [%]
200
150
100
50
Japan (2002-2012)
0 2000
2002
2004
2006
2008
2010
2012
2014
Time, t [Calendar years]

Figure 12: The rising values of the Debt-GDP ratio for Japan in the 21st century. The 2012 debt level is 215.5% of the GDP having increased from 146.4% in 2002. The GDP, however, did not stop growing, as illustrated in Figure 13.
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250
200
Debt/GDP, y/x [%]
150
100
50
Japan (2002-2012)
0 0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00

7.00 6.00
x = 0.293y + 2.338 r2 = 0.958
5.00 4.00 3.00 2.00 1.00 0.00 0.00
Japan (2002-2012)
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00

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Figure 13a (top): The rising values of the GDP and the Debt-GDP ratio for Japan in the 21st century. The GDP growth is measured here in terms of the absolute GDP values for each year. Figure 13b (bottom): The rising values of the GDP as Debt (and the Debt-GDP ratio) for Japan in the 21st century (2002-2012). The GDP growth is measured here in terms of the absolute GDP values for each year. Although the Debt is plotted here on the horizontal axis, the symbol y is retained. Also, the symbol x is retained for the GDP plotted on the vertical axis. A very positive correlation between the Debt and GDP is revealed here with a nearly 50% increase in the GDP. Since x = 0.293 y + 2.338, it follows that y = 3.418x - 7.993 (Type I behavior according to the GDP-Debt classification.)
The performance measure x/x used for the economic, or GDP, growth leads to inconsistent results as we see from the examples of Japan, Australia, Brazil and Canada illustrated in Figures 14 to 17. Starting with Japan, see Figure 14, although we see periods of negative growth rate, as measured by x/x value, there are periods of positive growth values of well above 5%. Hence, the argument of weak economic growth, once the DebtGDP ratio exceeds 90%, is certainly being repudiated by one of the most advanced economies in the post-World War II era. The correlation between these two measures of economic performance is also not clear. One can certainly postulate a negative trend, as shown by the line joining two extreme data points in Figure 14, see also the Canadian trend in Figure 15. However, we also see the opposite and positive trend between these variables. (No attempt has been made to develop a linear regression equation for the Japanese trend.)
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15.00
GDP Growth rate, x/x [%]
10.00
5.00
Japan (2002-2012)
0.00
-5.00
-10.00 100 120 140 160 180 200 220 240
Debt/GDP ratio, y/x [%]

Figure 14: The GDP growth rate (x/x) and the Debt-GDP ratio (y/x, converted to a percent) for Japan in the 21st century. The GDP growth as measured here shows periods of both positive and negative growth. A general negative trend could be postulated but this negated by observations on other economies. For Canada, a negative growth rate, as measured by was observed only for 2009, which is clearly a consequence of the financial crisis of 2008 in the US. At all other times, the GDP growth rate was positive and above 5% (note that fractional ratios are being used in this graph without converting to %). A negative trend can again be postulated. 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. observed.
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0.30 0.25
GDP Growth rate, x/x
0.20 0.15 0.10 0.05 0.00 -0.05 -0.10 0.60
Canada (2002-2012)
0.70
0.80
0.90
1.00
Debt/GDP ratio, 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. The trend line, with negative slope, is the straight line joining the data for 2004 and 2012. The Australian case is illustrated in Figure 16. The Debt/GDP ratio (converted here to percent) is quite low for Australia. Even so both positive and negative trends in the GDP growth rate, as measured by x/x values are observed. (These are illustrative, not based on any numerical calculations.) Brazil, 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). Periods of low, and negative, GDP growth are also observed and correspond to the higher Debt/GDP ratios.
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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
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)
10
20
30
40
50
60
70
80
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 worlds 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 OBrien: Is the Reinhart-Rogoff methodology even the right one? When millions are unemployed and kept out of work by austerity prescriptions, as noted by OBrien, 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 Herndons 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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Unlike the profits and the revenues of a company, or the GDP of a country, which refer to their values over a specific time interval, such as a quarter or a year, the debt is the aggregated value over many years. In the case of the US, the national debt is the aggregated value since January 1835. Hence, strictly speaking, the ratio Debt/GDP is NOT a dimensionless quantity and has units of time. What is the date on which the debt was zero for other countries? This is rarely, if ever, discussed. Ratios such as profit/revenues (both in same currency units and measured over the same time period) are pure numbers. The ratios v/c, or v/vs , used in physics (Einsteins theory of relativity) and engineering (aeronautics) are pure numbers. Here v is the speed, or the velocity, of a moving body, c the speed of light, and vs the speed of sound. 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. Such pure numbers, also called dimensionless numbers, are used to describe various complex phenomena and processes, such as heat flow, fluid flow, transport of matter, etc. The first of such dimensionless numbers conceived was the Reynolds number, Re, (named after Osborne Reynolds, click here). The value of Re characterizes the regimes of smooth (or laminar) flow and turbulent flow in a fluid like water, or air, flowing past a body (like an aircraft or a moving automobile, or within a pipe, or even our blood vessels). Lower numbers (< 2300) indicate laminar flow while higher numbers (> 4000) indicate turbulent flow. The Reynolds number Re = V/(/L) where the numerator V is the velocity of the fluid and the denominator /L has units of velocity with being a property of the fluid called the kinematic viscosity (units of m2/s, meters squared per second) and L is a relevant length unit (such as diameter of a pipe, or blood vessel, through which the fluid is flowing, or some other significant length unit). The ratio /L = (m2/s)/m = m/s. The use of the proper dimensionless numbers greatly aids in our understanding of many complex phenomena.
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Indeed, 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. The Yale economist, Robert Shiller, has discussed this in a 2011 piece (click here, Refs. [25,26]). To quote, Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP? That would clearly be nonsense. After all, 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. There is nothing special about using a year as that unit. A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance. Perhaps, someday, we will have a true dimensionless number which characterizes an economy in turbulent times. Since the unit of time (one year, or one quarter) is implied in GDP, whereas the Debt is an aggregated value over time, one must be careful when using the Debt/GDP ratio, the center piece of the Reinhart-Rogoff paper. No country is expected to pay off the Debt in a single year. (In the case of the US, the debt has been accumulating since 1835 when, for a brief period under President Andrew Jackson, the US debt was $0). Also, as noted by Shiller, the growth rate always decreases with increasing values of the Debt/GDP ratio, only a little more so at the higher ratios (nonlinearity). However, as we see from the comparison of the more recent data (2002-2012), we also see the opposite trend, especially with Australia and Brazil. 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, 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.
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GDP = C + I + G + (X M) = A + G Deficit (or Surplus) = Govt. Receipts Govt. Spending
..(4) ..(5)
In equation 4, which applies for a year (or a quarter) C is private consumption, I is gross investment, G is government spending, X is the value of all exports and M is the value of all the imports (click here).
Table 5: The US Annual Deficits and GDP (2002-2012)

Annual Deficit D Deficit/GDP $ Trillions (Converted to %) (from Budget) 2012 15.174 1.087 7.16 2011 14.555 1.2996 8.93 2010 14.079 1.294 9.19 2009 14.179 1.413 9.97 2008 14.021 0.459 3.27 2007 13.403 0.161 1.20 2006 12.677 0.248 1.96 2005 11.921 0.318 2.67 2004 11.197 0.413 3.69 2003 10.687 0.378 3.54 2002 10.326 0.158 1.53 Data Source: GDP values from The Economist, The Global Debt Clock (click here) and Annual Deficits from Presidents Budget (click here) The parameter A lumps together all items in equation 4 except government spending G. In equation 5, the governments annual deficit (or surplus) is the difference between its receipts (usually from taxes, hence increasing the number of employed and reducing unemployment will boost the GDP and reduce the Debt/GDP ratio as well) and its outlays, or spending. If outlays, or spending, is greater than the receipts, a deficit is incurred. The debt is the aggregated value of all the deficits over many such time periods. (In recent history, the Clinton years, click here, witnessed decreasing deficits which then turned into a surplus during the second term, in the years 1998, 1999, 2000 and 2001; see discussion in the articles listed under Ref. [9].)
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Year
GDP, x $, Trillions
Thus, the Surplus S = (R G) or G = (R S) = R + D if we use one year as the basis. Here R is receipts and D is the deficit (which is a negative surplus). Combining equations 4 and 5 we arrive at (which apply for one year): GDP = A + R + D = A + D Or, D/GDP = 1 - A/GDP ..(6) ..(7)
Thus, the graph of the GDP versus the annual deficits (AD) might also reveal a linearity, similar to the GDP-Debt graph. The annual deficits, obtained from Ref. [27], and the GDP, obtained from Ref. [15], have been compiled in Table 5. 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 $16 T) have mounted (with studies such as Reinhart-Rogoff issuing dire warnings), the GDP has continued to grow, see Figure 18.
16.00
Annual GDP or Deficit [$, T]
14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2000
Annual GDP [Calendar years]
Annual Deficit (AD) [Calendar years]

2002 2004 2006 2008 2010 2012 2014
Time, t [Calendar years]

Figure 18: Growth of the US annual deficits and the GDP for 2002-2012.
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The annual deficit (AD) to GDP ratio or percent, AD/GDP, has increased but is still less than 10%, as of 2012, and in the years immediately following the financial crisis (see also the remarks by Gordon in Refs. [25,26]). Short line segments with both positive and negative slopes can be seen in the AD-GDP graph of Figure 19.
1.60
2009
1.40 1.20
2010 2012
Annual Deficit [$, T]
1.00
0.80 0.60 0.40 0.20 0.00 10.00
2004
2008 2007
11.00
12.00
13.00
14.00
15.00
16.00
Annual GDP [$,T] Figure 19: Rapid rise in the US annual deficits, following the financial crisis of 2008 and the subsequent decline since 2010. The annual US budget deficit is less than 10% of the GDP in 2012. Finally, we consider the following plot of y/y, the fractional change in the debt between any two years of interest (need not be consecutive) and x/x, the fractional change in the GDP, during the same period. Thus, y = (y2 y1) and x = (x2 x1) where subscripts 1 and 2 denote the start and end of the time period of interest, for example, 2002 and 2012. Hence, the ratio x/x1 = rx = (x2 /x1) 1. This means (x2 /x1) = (1 + rx). Likewise, y/y =ry = (y2 /y1) 1 or (y2 /y1) = (1 + ry).
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Thus, when y/y = ry = 1, the debt ratio (y2 /y1) = 1 + ry = 2and when y/y = ry = 2, the debt ratio (y2 /y1) = (1 + ry) = 3 and so on. A graph of y/y versus x/x for the 30 countries in Table 4 is presented in Figure 20. Note that fractional changes (improper fractions greater than one), NOT percent changes, are being used here.
Fractional change in GDP, x/x = (1 + rx)
5.00
Russia
4.00
China
y/y = x/x
Brazil Australia Malaysia
3.00
Chile
2.00
S. Africa India
Germany Canada
Norway
1.00 Japan 1.00
USA
2.00
UK
3.00
Ireland
4.00 5.00
0.00 0.00
Fractional change in debt, y/y = (1 + ry)

Figure 20: The fractional changes in the debt and the GDP for 30 leading economies for the period 2002-2012. As discussed in the text, y/y = 1 means a doubling of debt relative to the starting year of 2002. Although there is clearly a lot of scatter, this diagram reveals that increasing debt levels are also accompanied by increasing GDP levels. The use of these fractional changes avoids some of the issues with weighting and the averaging of the GDP growth (for different countries, over several years) that have now become apparent with the Reinhart-Rogoff methodology.
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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, y/y

3.690 1.099 0.862 2.424 1.575 1.151 2.218 0.655 1.214 1.799 1.361 2.062 1.949 4.718 0.57 0.959 1.206 2.800 0.442 1.453 2.435 3.696 2.866 0.035 2.021 2.070 1.759 0.458 2.548 2.122
Fractional GDP Change, x/x

2.749 0.939 0.972 3.452 1.425 2.553 4.648 0.849 0.915 0.851 0.714 0.966 2.577 0.804 0.982 0.746 0.498 1.914 0.527 0.872 1.691 1.434 0.727 4.856 1.962 2.831 1.155 1.120 0.523 0.469
Ratio of (x/x)/(y/y)
0.745 0.854 1.128 1.424 0.905 2.218 2.095 1.296 0.753 0.473 0.525 0.468 1.322 0.170 1.723 0.778 0.413 0.684 1.193 0.600 0.694 0.388 0.254 138.89 0.971 1.368 0.657 2.446 0.205 0.221
The countries highlighted by yellow in the last column fall above the line y/y = x/x in Figure 20. Countries with bolded names do not appear in Table 1 of Reinhart-Rogoff. In the diagrammatic representation of the GDP-Debt data suggested here, all countries can be divided into two groups, those that fall above the line y/y =
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x/x and those that fall below this line. This comparison avoids the difficulties with the Debt/GDP ratio noted earlier in the discussion of pure numbers, or dimensionless numbers. Unlike the GDP, the Debt has accrued over many years which are NOT the same for each country. For the USA, for example, the debt has been accumulating since 1835 whereas for an emerging country like India or South Africa, or even Russia (post-Communist), we are talking about a much shorter time period for debt accumulation. By considering the changes y/y and x/x over defined time intervals, like 2002 and 2012 in the above comparison, we overcome this fundamental difficulty with the use of the Debt/GDP ratio, especially in this politically charged debate about austerity and the long term effect of the debt burden on economic growth. A review of Figure 20 reveals an interesting pattern. All of the emerging economies, the BRICS nations (Brazil, Russia, India, China, and South Africa) fall above the line y/y = x/x. Russia was able to grow its GDP, during the period 2002 to 2012 with very little increase in its debt. The other BRICS nations also had much higher GDP growth than debt growth (x/x > y/y). The advanced economies like USA, UK, Japan, and Canada, fall below the line but still showed a growth in their GDP although the debt has also increased. Indeed, 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, with increasing debt and increasing growth. 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. Thus, as noted by Reinhart in recent response (see references cited), the effects of crippling high debts (with Debt/GDP ratio above 90%) on GDP growth (or economic growth) appears to be very country specific. Even high debts are associated with growth when we consider the time span of a decade. 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. On much shorter time scales, we do see negative effects of high debt, as with the Greek episode illustrated in Figure 21.
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0.6 0.5
0.4 0.3 0.2 0.1 0 0.00 -0.1
Greece (2002-2012)
0.10 0.20 0.30 0.40 0.50

-0.2
Figure 21: The Greek episode of the last decade (2002-2012) when the Debt/GDP ratio varied from a low of 99.6% (in 2005) to a high of 160.5% (in 2012). The Debt/GDP ratio came down slightly reaching the lowest in 2005 and then started rising. However, the GDp-Debt graph shows a nearly constant upward slope during this entire episode. Following the crisis years of 2008 and 2009, the GDP started shrinking and the debt increased, showing the curling back upon itself pattern.
After the 2008 financial crisis, 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. 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.
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In Conclusion,
1. 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. Everything is country specific. 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. 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 measures of economic performance. However, quite surprisingly, the remarkably simple and linear relationship between the GDP x and the Debt y, 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, x/x, is tenuous at best (even without the Microsoft Excel coding errors reported by the UMass economists). Indeed, as shown here there is no consistent relationship between y/x and x/x whereas all the three, theoretical conceivable, x-y relations are observed when we consider the readily available economic data for several countries. 3. 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. The cumulative value of the annual deficit (AD) is the total national debt D. Hence, 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, the two important components of the GDP. A higher C can be achieved by promoting policies that create jobs. The higher the number of employed, the higher the available income that can boost consumption C. It would also help boost government spending G via higher the government receipts, which follow from higher taxes collected, which means more taxing paying citizens, or citizens with jobs. Higher government receipts also mean lower deficits and hence smaller additions to the debt. The focus can thus be shifted to economic growth which means
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4.
5.
6.
7.
8.
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. The example of Japan, with a crushing Debt/GDP, which increased from about 150% in 2002 to 215.5% in 2012 is noteworthy. The extraordinarily high Debt/GDP ratios (nearly 2.5 times the threshold of 90% according to Reinhart-Rogoff) did NOT prevent the Japanese GDP from growing. It increased from $3.938 T in 2002 to $5.901 T in 2012. 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, an emerging economy, 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, although less than the 90% threshold of Reinhart-Rogoff. The Japanese and Brazilian examples, and other examples cited in the main text, show that an increasing, or a high Debt/GDP, is NOT a barrier to economic growth. A new diagrammatic representation is suggested to assess the GDP growth (x/x) relative to Debt growth (y/y), which also takes into account the significance of the linear law relating the GDP and the debt. This avoids the difficulties with improper accouting of time factors implicit in the public debt, which has accrued over many years (decades, even centuries) and varies widely between different countries, especially the advanced economies and the emerging economies. 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, such as the Debt-GDP relation, the profits-revenues relation, the unemployed-labor force relation, and so on. In each case, it can be shown that a simple linear law, y = hx + c, 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. These topics have been discussed in other articles that may be found at this website.
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This is NOT about Reinhart-Rogoff, the Debt, GDP, the Debt/GDP ratio or GDP Growth. That would be an incidental outcome. Rather this is meant to be a discussion about how we use y/x ratios like the Debt/GDP ratio in the current problem. There are many such y/x ratios that are being used, essentially indiscriminately, without investigating the underlying x-y relation. The discussion here is aimed to highlight this fundamental problem in economic, financial, business, or other social and political analyses. The Reinhart-Rogoff error debate seemed like a good opportunity to get this message across. If this does NOT get economists, financial and business analysts thinking about how we (ab)use y/x ratios, nothing ever will. A nonzero intercept c is present in many problems that we try to analyze and is akin to Einsteins work function in physics. Its generalization outside physics has been discussed separately.
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Reference List
1. Growth in a Time Before Debt, by Carmen Reinhart and Kenneth S. Rogoff, http://www.nber.org/papers/w15639.pdf NBER Series, Working Paper 15639. On page 11, Over the past two centuries, debt in excess of 90
percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP). Of course, there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy, however, that those high-growth high-debt observations are clustered in the years following World War II. And, on page 23, Why are there thresholds in debt, and why 90 percent? This is an important question that merits further research, but we would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of debt intolerance in Reinhart, Rogoff, and Savastano (2003). As we argued in that paper, debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity analysis. A general result of our debt intolerance analysis, however, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs.
2. Does High Public Debt Stifle Economic Growth? A Critique of Reinhart/Rogoff, by Thomas Herndon, Michael Ash, and Robert Pollin, http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa63 88b1/publication/566/ April 15, 2013. 3. Guest Post: The Grad Student who took down Reinhart-Rogoff Explains Why Theyre Fundamentally Wrong, Business Insider, by Thomas Herndon, April 22, 2013, http://www.businessinsider.com/herndonresponds-to-reinhart-rogoff-2013-4
4. Guest Post, Reinhart/Rogoff and Growth in a Time Before Debt, by Arindrajit Dube, April 17, 2013, The Next New Deal, The Roosevelt Institute, http://www.nextnewdeal.net/rortybomb/guest-postreinhartrogoff-and-growth-time-debt See also references to internet blogs cited by Dube. 5. The Great Debt Delusion: How Math Keeps Proving Austerity Wrong, The Atlantic, by Matthew OBrien, April 16, 2013,
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6.
7.
8.
9.
10.
11.
12.
13.
http://www.theatlantic.com/business/archive/2013/04/the-great-debtdelusion-how-math-keeps-proving-austerity-wrong/275037/ Revisiting Reinhart-Rogoff: Free Exchange, by R A, The Economist, April 17, 2013 http://www.economist.com/blogs/freeexchange/2013/04/debtand-growth The Reinhart-Rogoff Debt-to-GDP Error: Why it Matters? By Dean Baker, Center for Economic Policy Research, April 18, 2013, http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoffdebt-to-gdp-error-why-it-matte Tax research UK: Richard Murphy on Tax and Economics, When Economists are Wrong, we all Suffer, Posted on April 18, 2013, http://www.taxresearch.org.uk/Blog/2013/04/18/when-economists-arewrong-we-all-suffer-and-we-now-know-the-debt-obsession-is-whollymisplaced/comment-page-1/ Bibliography, Articles on Extension of Plancks Ideas and Einsteins Ideas beyond physics, Compiled on April 16, 2013, http://www.scribd.com/doc/136492067/Bibliography-Articles-on-theExtension-of-Planck-s-Ideas-and-Einstein-s-Ideas-on-Energy-Quantum-totopics-Outside-Physics-by-V-Laxmanan Airline Quality Report: An Analysis of On-Time Percentages, Published April 18, 2013, http://www.scribd.com/doc/136760664/Airline-QualityReport-2013-Analysis-of-the-On-Time-Percentages Airline Quality Rating 2013, Purdue University, e-Pubs, April 8, 2013, by Dr. Brent D. Bowen (Purdue University, College of Technology) and Dr. Dean E. Headley (Wichita State University, W. Frank Barton School of Business) http://docs.lib.purdue.edu/aqrr/23/ Airline Quality Report 2013: An Analysis of On-Time Percentages, Published April 18, 2013, http://www.scribd.com/doc/136760664/Airline-Quality-Report-2013Analysis-of-the-On-Time-Percentages Babe Ruths 1923 Batting Statistics and Einsteins Work Function, Published April 17, 2013, http://www.scribd.com/doc/136489156/BabeRuth-s-1923-Batting-Statistics-and-Einstein-s-Work-Function
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14. Babe Ruth Batting Statistics and Einsteins Work Function, To be Published April 17, 2013, http://www.scribd.com/doc/136556738/BabeRuth-Batting-Statistics-and-Einstein-s-Work-Function 15. The global debt clock, The Economist, See example of data for Canada, for 2012, http://www.economist.com/content/global_debt_clock 16. Ten Countries Deepest in Debt, in Huffington Post, Compiled by 24/7 Wall Street http://www.huffingtonpost.com/2012/02/15/countries-indebt_n_1278711.html 17. Legendre, On Least Squares, English Translation of the original paper http://www.york.ac.uk/depts/maths/histstat/legendre.pdf 18. Line of Best-Fit, Least Squares Method, see worked example given http://hotmath.com/hotmath_help/topics/line-of-best-fit.html The formula for h used in this example is an actually approximate one and was used, before the advent of modern computers, since it only involves the determination of x2 and xy and the sum of all the values of x, y, x2 and xy. The exact formula, is given below, with xm and ym denoting the mean or average values of x and y in the data set, and ym = hxm + c since the bestfit line always passes through the point (xm , ym). h = (x xm)(y ym)/ (x xm)2 Determine the deviations of the individual x and y values from the mean, or average, (x xm) and (y ym). Determine the product (x xm)(y ym) and their sum. This gives the numerator in the expression for h. Determine the square (x xm)2 and the sum. This gives the denominator in the expression for h. This also fixes the intercept c via ym = hxm = c . Then, using the regression equation, determine the predicted value yb on the best-fit line and the vertical deviation (y yb) and the squares (y- yb)2. The sum of these squares is a minimum. This can be checked by assigning other values for h (using any two points) and allowing the graph to pivot around (xm, ym). The regression coefficient r2 = 1 - { (y- yb)2 / (y- ym)2 } is a measure of the strength of the correlation between x and y (or y/x versus x). For a perfect correlation, when all points lie exactly on the graph, r2 =+1.000.
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19. How to Calculate the Real GDP Growth Rate? By C. Taylor,

http://wiki.fool.com/How_to_Calculate_the_Annual_Growth_Rate_for_Real_GDP
20. What is the GDP Growth Rate? By Kimberly Amadeo,

http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Growth_Rate.htm
21. Gross Domestic Product (GDP), http://en.wikipedia.org/wiki/Gross_domestic_product 22. List of countries by GDP (nominal) http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29 23. List of countries by GDP growth rate,
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28real%29_growth_rate
24. Economic Growth, http://en.wikipedia.org/wiki/Annual_average_GDP_growth 25. Debt and Delusion, by Robert J Shiller, July 21, 2011, http://www.projectsyndicate.org/commentary/debt-and-delusion 26. Deluded about debt, Slate Magazine, by Robert Shiller, July 21, 2011, http://www.slate.com/articles/business/project_syndicate/2011/07/delu ded_about_debt.html 27. The Presidents Budget for fiscal year 2014, Click on Historical tables for the annual deficits data http://www.whitehouse.gov/omb/budget, see Table 1.1, page 23, for historical values of deficits/surpluses
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist.pdf
28. Bureau of Public Debt, http://www.publicdebt.treas.gov/ See US Public Debt on home page and click on US debt to the penny. 29. A Short History of the National Debt, by John Steele Gordon, http://online.wsj.com/article/SB123491373049303821.html Concluding remarks from this nice article on the history of the US national debt.
It has been widely noted that 2009 will have the first "trillion-dollar deficit" in American history. Actually it's the second. In fiscal 2008, the national debt increased from $9 trillion to slightly over $10 trillion. Yet the budget deficit in the last fiscal year was officially reported as being $455 billion. How could the national debt have increased by considerably more than twice the "deficit"? Simple. Just call the money borrowed from the Social Security trust fund an "intragovernmental transfer" and exclude it from the calculation of the deficit. Corporate managers have gone to jail for less book cooking than that.
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30. Building the State (1789-1797): Alexander Hamilton and Finance in the Washington Administration, Hamilton wanted to ensure financial stability of the new nation and build a strong national government. With the approval of President Washington, he prepared the first Report on Public Credit, which was submitted to the Congress in January 1790. In his report, Hamilton estimated the US debt at $54 million with the states owing an additional $25 million (total of $79 million).
http://www.sparknotes.com/history/american/statebuilding/section9.rhtml
31. Why the Founding Fathers loved the National Debt, by William Hogeland, January 25, 2013, http://www.bloomberg.com/news/2013-0125/why-the-founding-fathers-loved-the-national-debt.html 32. Fla. Senator says January 8 was the only day the US was debt free,
http://www.politifact.com/truth-o-meter/statements/2010/jan/11/georgelemieux/fla-senator-says-jan-8-1835-only-day-us-has-been-d/
The following added after initial publication on April 26, 2013. 33. Reinhart-Rogoff Rebuttal says UMass Critics Politicized Debate, Bloomberg, by Sharon Chen, April 26, 2013, http://www.bloomberg.com/news/2013-04-26/reinhart-rogoff-disputeumass-criticism-of-debt-study-findings.html The economists acknowledged on April
17 that they had inadvertently left some data out of their calculations in the study, in response to a paper released on April 15 by three researchers from the University of Massachusetts at Amherst. Still, the error didnt change the basic findings of their research, they said. Reinhart and Rogoff today addressed the technical issues raised by their critics -- Ph.D. candidate Thomas Herndon and professors Michael Ash and Robert Pollin -- in particular that they had committed serious errors of selective exclusion of available data and unconventional weighting of summary statistics. 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. It has been cited by U.S. 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.
34. Carmen Reinhart and Ken Rogoff: Debt, Growth, and Austerity Debate, April 26, 2013, http://delong.typepad.com/sdj/2013/04/carmen-reinhartand-ken-rogoff-debt-growth-and-the-austerity-debate.html The academic
literature on debt and growth has for some time been focused on identifying causality. 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, and that there is no rule that applies across all times and places. In a paper
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35. Is the evidence of austerity based on an Excel spreadsheet error? By Brad Plummer, April 16, 2013, http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/16/isthe-best-evidence-for-austerity-based-on-an-excel-spreadsheet-error/ 36. The Grad Student Who Took Down Reinhart Rogoff Explains Why they are Fundamentally Wrong, Business Insider, April 22, 2012, by Thomas Henderson http://www.businessinsider.com/herndon-responds-toreinhart-rogoff-2013-4http://www.businessinsider.com/herndonresponds-to-reinhart-rogoff-2013-4#ixzz2RZLUnJE8 37. How a student took down eminent economists on debt issue and won, Reuters, Edward Krudy, April 18, 2013, http://news.yahoo.com/student-took-eminent-economists-debt-issuewon-095347790--business.html 38. Reinhart and Rogoff are not being straight, Center for Economic and Policy Research, April 26, 2013, http://www.cepr.net/index.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. Reinhart, we looked at virtually all episodes of sustained high debt in the advanced economies since 1800. Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested.
39. Reinhart/Rogoff and Growth in a time before Debt, Blog Post by The Century Foundation, http://www.tcf.org/blog/detail/tcfbest-winnerreinhart-rogoff-and-growth-in-a-time-before-debt 40. Robert Samuelson tries to Salvage Reinhart-Rogoff and Austerity, Center for
Economic and Policy Research (CEPR) Blog, by Dean Baker, April 25, 2013, http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelson-triesto-salvage-reinhart-rogoff-and-austerity
41. Iceland votes against austerity: Analysis of the GDP-Debt Data, Published April 28, 2013, http://www.scribd.com/doc/138345921/IcelandVotes-Against-Austerity-Analysis-of-Iceland-s-Debt-GDP-Data-2002-2012 The nonzero intercept c, in y = hx + c, may be thought of as a work function, similar to Einsteins work function from physics. This is discussed here and also compared to the batting stats of a baseball player, which also reveals a work function.
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Appendix 1 Interesting Mathematical Property of Ratios and an Overlooked Property of a Straight line
25
Dependent variable, y
20
y = mx = 0.5x y/x = m = 0.50

15
10
0 0 10 20 30 40 50
Independent variable, x
Figure A1.1: The straight line y = mx passing through the origin. The ratio y/x = m = constant at all points along this line. 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. The straight line in Figure 1 passes through the origin (0, 0) and has the equation y = mx. The ratio y/x = m = constant as we move up or down this line and is equal to the slope of the line. A doubling of x produces a doubling of y; a tripling of x produces a tripling and so on. You can check out the x and y values by following the gridlines.
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25
20
Type II Slope h > 0, Intercept c > 0
15
10
Type I Slope h > 0, Intercept c < 0
Type III Slope h < 0, Intercept c > 0

0 10 20 30 40 50
-5
Figure A1.2: Three types of straight lines that do NOT pass through the origin. Now, consider the situation when the straight line does not pass through the origin, as illustrated in Figure 2. The behavior y/x is illustrated in Figures 3a and 3b. Now, think about what this means when we use simple y/x ratios to make important decisions, like we do on a daily basis. The familiar profit margin of a company is a ratio, the ratio of profits y to revenues x. The earning per share is a ratio, the ratio of earnings (another name for profits) and the total number of outstanding shares. Is there a nonzero intercept in these problems? Does a doubling of revenues lead to a doubling of profits? If the answer is NO, there must be a nonzero intercept. What does the nonzero intercept c mean? What does it signify?
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1.0 0.9 0.8
y = 0.5x + 2 y/x = 0.5 + (2/x)
The ratio y/x
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0 20 40 60 80
y = 0.5x y/x = 0.5
A B C
y = 0.5x - 2 y/x = 0.5 - (2/x)
100 120
Figure A1.3a: The ratio y/x is NOT a constant and varies on different points on a straight line, if the straight line does NOT pass through the origin. The ratio y/x is a constant at all points on a straight line only it passes through the origin. Type I: Positive slope, negative intercept (h > 0, c < 0): The ratio y/x increases as x increases (and vice versa when x decreases). However, the maximum value of the y/x ratio is h, the slope of the line. Mathematically speaking, the graph of y/x versus x is an upward sloping hyperbola since y/x = h + (c/x). Type II: Positive slope, positive intercept (h > 0, c > 0): The ratio y/x decreases as x increases when we move up this straight line (as vice versa when x decreases). The limiting value of y/x is again equal to h. Type III: Negative slope, positive intercept (h < 0, c > 0): The ratio y/x decreases as x increases when we move down this straight line. Eventually, y becomes negative and the ratio y/x also becomes negative and reaches the limiting value h < 0.
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If we put all the three cases together, we get the nonlinear equation 1 below, y = mxn [e-ax / (1 + be-ax) ] + c ..(1)
2.50 2.00
The ratio y/x
1.50 1.00 0.50 0.00 -0.50 -1.00 0 20
y = -0.5x + 20 y/x = -0.5 + (20/x)
40
60
80
100
120
Figure A1.3b: Variation of the ratio y/x on the Type III line, y = -0.5x + 20. As x increases, the ratio y/x = -0.5 + (20/x) decrease continuously and becomes zero when x = 40. For x > 40, the ratio y/x becomes negative and approaches the limiting value of h = -0.5, the slope of the line, at very large values of x. The graph is a falling hyperbola. (Mathematically speaking, y/x h, as x , for all three cases. This is called the asymptotic value of the ratio y/x for very large x.) For the special case of n = 1, a = 0 and b = 0, equation 1 reduces to the general equation for a straight line and covers all the cases just discussed. We will discuss equation 1 in more detail later in this article. The three dashes line in Figure 3c are the Type I (h > 0, c < 0), Type II (h > 0, c > 0) and Type III (h < 0, c > 0) straight lines. The smooth curve is the graph of equation 1 with the
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values of m = 1, n = 0.5, a = 0.1 b = 0 and c = -0.1. The maximum point occurs at x = xm = n/a = 0.5/0.1 = 5.0.
1.8 1.6
1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 0 2 4 6 8 10 12 14 16
Figure A1.3c: The simplest mathematical equation relating the variables x and y with a maximum point, y = mxne-ax. All the three types of straight lines can be thought of as small segments of this general curve relating the variables x and y. The use of various y/x ratios, such as the On-Time (OT) arrival ratio discussed here in detail must be considered against this background. Profit margin, earnings per share, unemployment rate, labor productivity, birth rates, death rates, 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, such as the OT relation described here is often overlooked and attention is paid exclusively to the y/x as in Airline Quality Ratings. 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. The same
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considerations apply in the automotive industry when we compare companies like GM, Ford, and Chrysler (which used to operate huge automotive plants and produce a lot more cars and trucks) with their counterparts like Honda, Nissan, and Toyota (with much lower production levels). The repeated unfavorable comparisons of the American automotive companies with their Japanese counterparts eventually led to their bad image of being inefficient, with bloated labor costs, which led to lost customers and the eventual filing of bankruptcy of the old GM on June 1, 2009. Thus, how we use ratio to make different comparisons and make important decisions is of great fundamental importance to society as a whole. Rather surprisingly, the mathematical property of y/x ratios and a straight line, which has been highlighted here, seems to have been completely overlooked. If you have heard about apples and oranges comparisons, it is because of this nonzero c and what it does to the ratio y/x. Perhaps, melons and pineapples hereon! , instead of apples and oranges. Finally, the power-exponential law, given as equation 1 here, is a generalized statement of the famous blackbody radiation law derived by Max Planck in December 1900. Einsteins uses a simplified version of this law, y = mxne-ax, in his 1905 paper, describing the quantum nature of light radiation. I have shown that Plancks law can be re-derived and extended to many problems outside physics, by generalizing Plancks ideas and Einsteins ideas. This is discussed in the articles listed under Ref. [9]. When he developed quantum physics, Planck actually derived the general expression for the average value of any property of interest that characterizes the behavior of a complex system. The articles on the 2013 Forbes billionaires, Babe Ruths batting average, and Airline Quality Rating, provide a simple way of understanding this generalization. The symbol U denotes energy in physics. But, we can also associate other meanings to this mathematical symbol and re-derive Plancks law. For example, 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.
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Some Personal Closing Remarks

Neither a lender nor a debtor be, goes an old saying. On January 1, 1791, during the first term of the first President, George Washington, the US national debt was $75, 463,376.51, see Ref. [28]. The US founding fathers, notably Alexander Hamilton (see Refs. [29,30]) 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; see the recent piece by Hogeland, Ref. [31]. This early domestic debt was being held by private Americans who financed the revolutionary war. All the early US Presidents were committed to paying off the national debt. Indeed, the public debt was completely paid off and the US was debt free ($0 debt, yes $0!) in January 8 1835, under President Andrew Jackson, see Ref. [32]. However, 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!). At the same time, US Presidents did not hesitate to incur a debt at times of war and other crises. Most the US national debt was incurred during times of War; see recent articles on the national debt under Ref. [9], starting with war of 1812 (also called the Second Revolutionary War, the fiscal crisis of 1837, the Civil War, World War I and World War II. Furthermore, American Presidents, like Lincoln, Woodrow Wilson, and FDR, did not hesitate to raise taxes on the rich to finance war time spending to keep the annual deficits (AD) under control. The first income tax was instituted in 1861 to pay off the Civil War debts but this was challenged and repealed by 1872. (Tariffs, and excise taxes on luxury goods, tobacco, liquor, firearms, etc. were the mean source of government revenues.) The income tax became a permanent source of government revenues only after a constitutional amendment (the 16th) was passed, in 1913. This new power of taxation was
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used effectively by President Wilson, who raised the top income tax rates from 7% to 77% when the US entered World War I. The top tax rate was likewise raised to 94% by FDR, during World War II. It was still an unimaginably high 91% (by todays standards) when President Kennedy took office on January 20, 1961. The current laissez-faire attitude to paying off the national debt seems to be a post-WWII phenomenon. When the US entered its most recent wars, the Iraq and Afghanistan wars, no attempts were made, for the first time in US history, to offset the war spending with increased taxes. Instead, President Bush (junior) championed cutting of the top tax rates and Congress passed it. Herein lie the seeds of the current mushrooming of the national debt, which is now nearly $16.8 T (trillions, or $16,781,967,402,405.37, to the penny, as of April 19, 2013, the latest figure available, click here). However, as we see here, the push for austerity programs and the slashing of the debt (to the point of injury to the weakest citizens, via cuts in social spending) may be misguided. The annual budget deficit is still less than 10% of the GDP. Personally speaking, there is nothing more exhilarating than NOT being in debt. There are many on the right of the economic and debt debate who find the national debt, like personal debt, to be morally objectionable. Murder is morally objectionable, but we, as a people, have granted the government to do exactly the same thing via capital punishment laws. Killing in a war (a just war) is not the same as murder. The same goes with economic and financial laws. We have bestowed government with certain powers that we as individuals lack, when it comes to dealing with budgets and finances. Hence, personal debt and national, or public, debt are NOT to be viewed in the same light. The sooner we understand this, the better we will be off as a nation, the economy will boom and we all get busy pursuing life, liberty, and happiness. And, so we must also confront one other moral objection the high unemployment rates that have devastated the lives of millions: both the young (who, fresh out of school and college, have no work experience and so cannot
Page | 62
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). As a society we also have a moral obligation to rebuild their lives. It is no different from rebuilding lives after a natural disaster like a hurricane, tornado, or an earthquake. We now face the real possibility of losing a whole generation of Americans to a state of permanent unemployment. No advanced nation that willingly tolerates tens of millions of unemployed can ever pay off its debt or reduce its Debt/GDP ratios. Cheers!
http://content.artofmanliness.com/uploads/2008/07/ap_kennedy_050111_assh.jpg
If a free society cannot help the many who are poor, it cannot save the few who are rich. President John F. Kennedy, Inauguration, Jan 20, 1961.
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Vj Laxmanan Comment Submitted to Business Insider on April 26, 2013 on Apr 26, 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, 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. Further details may be found in the document just uploaded, see link given below. http://www.scribd.com/doc/138076426/An-MIT-Non-Economist-s-View-of-the-Harvard-UMass-DebtGDP-Ratio-and-the-Economic-Growth-Debate Read more: http://www.businessinsider.com/herndon-responds-to-reinhart-rogoff-20134#ixzz2RZLUnJE8 Vj Laxmanan a minute ago
Vj Laxmanan On Apr 26, 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, exceeding 90%, on economic growth), it is important
Page | 64
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. Further details may be found in the document just uploaded, see link given below. http://www.scribd.com/doc/1380...
http://www.theatlantic.com/business/archive/2013/04/who-is-defending-austeritynow/275200/#comments http://www.salon.com/2013/04/21/meet_the_economics_whiz_who_outed_rr_partner/ Also submitted here. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/24/inside-the-offbeat-economicsdepartment-that-debunked-reinhart-rogoff/ Also at Washington Post, April 26, 2013.
Page | 65
Inside the offbeat economics department that debunked Reinhart-Rogoff

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

http://www.washingtonpost.com/blogs/wonkblog/files/2013/04/Screen-Shot-2013-04-24-at-3.30.19PM.png
Dube, testifying before the Senate HELP committee. (C-SPAN)
http://www.washingtonpost.com/blogs/wonkblog/files/2013/04/Screen-Shot-201304-24-at-3.33.15-PM.png
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Robert J. Samuelson Opinion Writer
The Reinhart/Rogoff brawl

By Robert J. Samuelson, Published: April 24
http://www.washingtonpost.com/opinions/robert-samuelson-the-reinhartrogoffbrawl/2013/04/24/6ed05be6-ad01-11e2-b6fd-ba6f5f26d70e_story.html
An insistent question of our time is, how much government debt is too much. 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. They suggested that debt exceeding 90 percent of a countrys economy (gross domestic product, or GDP) corresponds to a sharp drop in economic growth. But their work is being challenged by three other economists, who say that Reinhart and Rogoff made basic errors that invalidate their results. This dispute, which would normally be confined to obscure scholarly journals, has assumed greater visibility because it involves the debate over deficit spending. Its austerity versus stimulus. If debt exceeding 90 percent of GDP is hazardous, then the case for austerity seems stronger. (Already many countries exceed or are approaching the 90 percent mark.) If not, deficit spending remains a possible temporary spur. Which is it? Although the newly discovered errors in Reinhart and Rogoffs 2010 paper (Growth in a Time of Debt) are embarrassing, they do not alter one of its main conclusions: High debt and low economic growth often go together.
Attached following comment to above. (April 26, 2013, 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, 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).
Page | 68
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. Further details may be found in the document just uploaded, see link given below. http://www.scribd.com/doc/138076426/An-MIT-Non-Economist-s-View-of-the-HarvardUMass-Debt-GDP-Ratio-and-the-Economic-Growth-Debate Also posted at http://www.tcf.org/blog/detail/tcfbest-winner-reinhart-rogoff-and-growth-in-atime-before-debt on April 27, 2013 @ 4:18 PM.
Rortybomb
Reinhart-Rogoff a Week Later: Why Does This Matter?

http://www.nextnewdeal.net/rortybomb/reinhart-rogoff-week-later-why-doesmatter Also, added comment here. April 26, 2013
Mark Gongloff Become a fan mark.gongloff@huffingtonpost.com
Greg Mankiw On Reinhart-Rogoff: Hey, Everybody Makes Mistakes

Posted: 04/24/2013 5:11 pm EDT
Page | 69
http://www.huffingtonpost.com/2013/04/24/greg-mankiw-reinhart-rogoffmistakes_n_3149474.html
How a student took on eminent economists on debt issue - and won

By Edward Krudy | Reuters Thu, Apr 18, 2013
http://news.yahoo.com/student-took-eminent-economists-debt-issue-won095347790--business.html
View Photo
Reuters/Reuters - Harvard Professor and Economist Kenneth Rogoff speaks during the Sohn Investment Conference in New York, May 16, 2012. REUTERS/Eduardo Munoz By Edward Krudy NEW YORK (Reuters) - When Thomas Herndon, a student at the University of Massachusetts Amherst's doctoral program in economics, spotted possible errors made by two eminent Harvard economists in an influential research paper, he called his girlfriend over for a second look.
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As they pored over the spreadsheets Herndon had requested from Harvard's Carmen Reinhart and Kenneth Rogoff, which formed the basis for a widely quoted 2010 study, they spotted what they believed were glaring errors. "I almost didn't believe my eyes when I saw just the basic spreadsheet error," said Herndon, 28. "I was like, am I just looking at this wrong? There has to be some other explanation. So I asked my girlfriend, 'Am I seeing this wrong?'" His girlfriend, Kyla Walters, replied: "I don't think so, Thomas." In the world of economic luminaries, it doesn't get much bigger than Reinhart and Rogoff, whose work has had enormous influence in one of the biggest economic policy debates of the age. Both have served at the International Monetary Fund. Reinhart was a chief economist at investment bank Bear Stearns in the 1980s, while Rogoff worked at the Federal Reserve, passing through Yale and MIT before landing at Harvard.
http://www.slate.com/blogs/moneybox/2013/04/26/reinhart_rogoff_respond_unper suasively_to_their_critics.html by Matthew Yglesias, Slate Magazine

Reinhart & Rogoff Call Backsies
By Matthew Yglesias Posted Friday, April 26, 2013, at 8:11 AM
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Controversial economists Carmen Reinhart and Vincent Rogoff have a response to their critics in today's New York Times that ought to persuade nobody. The crucial move in this op-ed, as in other defenses of their "Growth in a Time of Debt" piece, is to obscure what it was that was allegedly interesting and allegedly important about the paper. The question, recall, was about the relationship between indebtedness (measured as the ratio of debt to GDP) and economic growth (measured as a change in GDP). 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. Countries with a high ratio of sheep to people generally have low populations, but that doesn't mean that killing sheep leads to population growth. 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. 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 therewhat I've been calling macroeconomic dark matterthat causes indebted countries to grow slowly even in the absence of high interest rates. It's this tipping point theory that's been debunked, and nothing in their response restores it. In fact, instead of rescuring the tipping point theory they disavow it. "Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested," they write. They say that "[o]ur view has always been that causality runs in both directions, 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."
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About the author V. Laxmanan, Sc. D.

The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, 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, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the groundbased experiments and in the space shuttle experiments. More recently, 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). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by Planck, referred to here as the generalized power-exponential law, might
Page | 73
actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton. Finally, during my professional career, I also twice had the opportunity and great honor to make presentations to two Nobel laureates: first at NASA to Prof. Robert Schrieffer (1972 Physics Nobel Prize), who was the Chairman of the Schrieffer Committee appointed to review NASAs space flight experiments (following the loss of the space shuttle Challenger on January 28, 1986) and second at GM Research Labs to Prof. Robert Solow (1987 Nobel Prize in economics), who was Chairman of Corporate Research Review Committee, 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.
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An MIT Non-Economist's View of The Harvard-UMass Debt/GDP Ratio and The Economic Growth Debate

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An MIT Non-Economists 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

Debt, y [$, Trillions]

United States (2002-2012)

GDP, x [$, Trillions]

An Overlooked GDP-Debt Growth law

Table B: Ten Countries Deepest in Debt

Debt, y [$, Trillions]

y = hx + c = 0.124x + 0.218 r2 = 0.983 Type II Behavior

GDP, x [$, Trillions]

Debt, y [$, Trillions]

y = hx + c = h(x x0) = 0.979x 0.825 = 0.979(x 0.843) r2 = 0.863 Type I Behavior

GDP, x [$, Trillions]

Debt, y [$, Trillions]

y = hx + c = 0.836x + 0.102 r2 = 0.996 Multi-country (2011)

GDP, x [$, Trillions]

3. An Important but Overlooked Mathematical Property of a Straight line

4. The Linear Debt-GDP law (2002-2012)

Table 1: The Debt and GDP data for Canada (2002-2012)

Table 2: The Debt and GDP data for Ireland (2002-2012)

Post-2008 Financial Crisis

Debt/GDP, y/x [%]

Pre-2008 Financial Crisis

GDP, x [$, Trillions]

Debt, y [$, Trillions]

y = hx + c = h(x x0) = 1.335x 0.78 = 1.335(x 0.584) r2 = 0.989 Type I Behavior

Post-2008 Financial Crisis

GDP, x [$, Trillions]

Pre-2008 Financial Crisis

Debt, y [$, Trillions]

y = hx + c = h(x x0) = 0.546x + 0.197 r2 = 0.9995 Type II Behavior

GDP, x [$, Trillions]

Debt, y [$, Trillions]

Canada (2002-2012) 2009

GDP, x [$, Trillions]

Debt, y [$, Trillions]

Ireland (2002-2012) 2012 8 2008

GDP, x [$, Trillions]

Debt, y [$, Trillions]

GDP, x [$, Trillions]

GDP, x [$, Trillions]

Debt, y [$, Trillions]

5. GDP Growth Rate and the Linear Debt-GDP law

Table 3: The GDP growth rate for Canada (2002-2012)

6. The 2012 Debt-GDP Relationship (30 Countries)

Table 4 : The 2012 GDP-Debt data for leading economies

Debt/GDP (y/x) (Converted to %)

Debt, y [$, Trillions]

8.00 10.00 12.00 14.00 16.00 18.00 20.00

GDP, x [$, Trillions]

Italy y = hx + c = h(x x0) = 0.792x - 0.095 r2 = 0.734

Debt, y [$, Trillions]

2.50 2.00 1.50 1.00 0.50 0.00 -0.50 0.00

GDP, x [$, Trillions]

Debt, y [$, Trillions]

GDP, x [$, Trillions]

200 180 160

Debt/GDP, y/x [%]

GDP, x [$, Trillions]

7. GDP Growth x/x versus Debt-GDP (y/x) ratio

240 220 200

Debt/GDP, y/x [%]

180 160 140 120 100 80 60 40 20