Will the sky fall?

In recent weeks a paper entitled " Growth in a Time of Debt ", written in 2010 by Professors Carmen M Reinhart and Kenneth S Rogoff, has been producing a lot of debate. In this paper Reinhart and Rogoff analyse data to show that when debt / GDP ratio of any country crosses 90% the economy begins to contract. Livemint 25 April. When the ratio is 0-30% GDP grows at 4.1%, between 30 and 60% the growth rate is 2.8%, between 60 and 90% it is 2.8% but above 90% the GDP grows at -0.1%. This is a serious and highly academic paper but it has caused a lot of heat because the Republicans have used it to argue for a sharp reduction in deficit in the US budget by severe cuts in government expenditure in Social Security and Medicaid, which provide a safety net for the poor. In recent weeks a paper by the Political Economy Research Institute at Massachusetts University  identified " coding errors, selective exclusion of available data, unconventional weighting of summary statistics " in the paper by Reinhart and Rogoff. They have studied the data and conclude that although GDP falls with rising debt levels, 90% is not a cutoff level at which it begins to contract. Their figures show that at a debt / GDP ratio of 0 to 30% growth is at 4.2%, between 30 and 60% growth is 3.1%, between 60 an 90% it is 3.2% and at above 90% it falls to 2.2%. Thus they show that growth in the GDP slows down with increasing debt but gradually and not as predicted by R&R. With the publication of the second paper a storm has broken out between economists who suggest that large deficits lead to inflation, high interest rates and falling investment, leading to lower growth. They suggest cuts in government spending, removal of all subsidies and lower taxes to encourage investment. This is the policy being followed in the UK and Europe but instead of growth Europe is in recession and the UK grew by 0.3% in the last quarter, thus avoiding a highly embarrassing triple-dip recession. Savage cuts in public sector spending has reduced investment, increasing unemployment which has reduced tax collections and poverty levels have increased as governments have laid off workers and cut benefits. The result has been an increase in levels of debt and enormous public anger. The other group of economists taunts the first group as " deficit scolds " saying that in a time of recession governments should increase spending which will increase investment and reduce unemployment, leading to increased tax collections which, in turn, will reduce deficits. They point to the US where the Federal Reserve is buying up bonds worth $80 billion every month but inflation and borrowing costs have stayed near 0%. Sadly, we Indians do not know what is happening here because our economists repeat what politicians tell them. We will know only when the sky falls on us.