Reinhart and Rogoff wrote the single most influential economic paper supporting the Austerity policies introduced by Governments around the world. Now a paper by some graduate students reduces their findings to rubble – saying they were caused by some elementary arithmetic coding errors in Excel, the selective exclusion of available data, and some highly questionable averaging methods. Is this what “thought leadership” in the western world is reduced to?
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff by Thomas Herndon, Michael Ash, and Robert Pollin. April 15, 2013.
Abstract
We replicate Reinhart and Rogoff (2010a and 2010b) and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP grow that public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower. We also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth
Reinhart and Rogoff then admitted their arithmetical error, but sought to argue their core conclusion remained valid. Here Hernden debunks this claim as well.
Herndon Responds To Reinhart Rogoff – Business Insider
Indeed, in the most recent period of 2000-2009, which in almost all cases will be the most relevant set of experiences with respect to current policy debates, average GDP growth when public debt is above 90 percent of GDP is higher than when the public debt/GDP ratio is between 60 and 90 percent. The findings in our paper are clearly not consistent with the notion that we consistently observe a sharp fall-off in economic growth when the public debt/GDP ratio exceeds 90 percent. As for the misconceptions concerning causality, I encourage people to read the contribution by my professor Arin Dube. His treatment of the topic is highly readable and offers strong evidence that causality runs from slow growth to high debt.
There is not one word in our paper which suggests that a high level of government indebtedness is never a problem. It would be absurd to think that governments never have to worry about their level of indebtedness. The aim of our paper was much more narrowly focused. We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth. The implication for policy is that, under particular circumstances, public debt can play a key role in overcoming a recession. The current historical moment, with historically high rates of mass unemployment in both the U.S. and Europe and with interest rates on U.S. Treasury bonds at historic lows, is precisely the set of circumstances under which we would expect public borrowing to have large positive effects, with comparably fewer costs. Moreover, it is precisely the set of circumstances under which we expect austerity to have substantial negative effects.
Thus not only is high debt (over 90% GDP) not necessarily correlated with low growth rates, but what causality there may be is actually the opposite of what Reinhart and Rogoff claimed: Slow growth causes high debt, not the other way around. But hey, when you are fighting a class war, any weapons will do: even weapons created by demonstrably bad arithmetic, selective exclusion of available data that doesn’t support your conclusions, and highly questionable averaging techniques. Reinhart and Rogoff are to the economic case for austerity policies what weapons of mass destruction were to the casus belli for war with Iraq: a convenient excuse. And by the time people find out it was all a sham the austerity war has been fought and won by the 1% global elite. Everyone else has been further impoverished.
Of course the elite apologists now argue that Reinhart and Rogoff weren’t really that important after all. Here’s Krugman in response:
Economics and Politics by Paul Krugman – The Conscience of a Liberal – NYTimes.com
Robert Samuelson tries to minimize the significance of the Reinhart-Rogoff affair; and that, I realized, offers an interesting window into why, in fact, the affair matters so much.
Samuelson starts by excusing R-R on the grounds that the economic crisis predates their blooper:
The Reinhart/Rogoff paper was published in January 2010, more than a year after Lehman Brothers’ failure and the onset of the financial crisis. At that point, all the ingredients of Europe’s debt crisis (housing bubbles in Spain and Ireland, huge budget deficits in Greece, weak banks throughout the continent) were also in place.
But while R-R obviously had nothing to do with the start of the crisis, the question is how they played into the response. For the remarkable thing about this ongoing slump isn’t so much that we had a financial crisis as the fact that we responded to it, not by applying what macroeconomists thought they had learned, but by repeating all the policy errors of the 1930s.