Reinhart/Rogoff Shot Full of Holes Updated X3
This story has rapidly made the rounds in the blogosphere, and it is indeed a big deal. One of the most significant economics papers underlying the argument for why high government debt (especially over 90% of gross domestic product) is bad for growth was published in 2010 by Carmen Reinhart and Kenneth Rogoff, “Growth in a Time of Debt” (ungated version here).
The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).
The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:
Debt/GDP Ratio R/R Results Corrected Results
Under 30% 4.1% 4.2%
30-60% 2.8% 3.1%
60-90% 2.8% 3.2%
Over 90% -0.1% 2.2%
As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff’s paper made it out to be.
The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.
Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.
Update 2: Paul Krugman’s response to Reinhart and Rogoff is here. He pronounces it very disappointing, saying they are “evading the critique.”
Update 3: Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:
The ‘gaps’ are explained by the fact there were still gaps in our public debt data set at the time of the paper. Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities.
This is a very odd response from two authors who equated one year of New Zealand to 19 years of the far larger UK economy. Worse still when you add the fact that by excluding several years when New Zealand had a debt/GDP ratio over 90%, they got an “average” (actually only one year) growth rate of -7.6%, when the correct average, with all relevant years over 90% included, was 2.58%, a 10.18 point swing!
It’s obvious that the austerity crowd is still going to defend this paper, but that doesn’t mean anyone else should be taken in by them.
Cross-posted from Middle Class Political Economist.
R+R’s responses, aside from their lameness, are a fine illustration of the ‘blindness of the entitled’. Faculty at places like Harvard get constant and very satisfying reminders of their own worthiness and superiority, and it is, humanly, almost impossible for them to retain any sense of balance about their very human capacity for error.
Thus we see R+R, faced by a combination of shameful sloppiness and manifestly skewed cherry-picking of data, who cannot imagine that the right response is to admit their errors. They do cop to the Excel snafu, but deny that it, or their other more consequential choices, might taint their work. How can _their_ work be tainted by error, when everyone has been telling them for years, verbally and non-verbally, that they are VIP worthies?
I’m inclined to think that the blindness of the entitled is actually a homeostatic regulatory mechanism: we see it so often, and to such a degree, in which people who are clearly intelligent and talented per se simply can’t see that admitting their error would be the culturally and socially appropriate response to making a mistake. Politicians are the most visible — think Weiner, think Sanford — but R+R’s public statement since the very visible critique of their work falls into the same category.
P Quincy,
I tend to think those in positions and stature of R & R have a hard time admitting an error or mistake because inside the admission might actually be compounding the lie.
That is, “mistake” is a convenient word when one has actually been lying about their intent. For that to work though, you have to have no concern other than your intent. And maybe such as R & R, they do have regard for their reputation. Thus the double bind and a defense all the way.
Here’s my issue with the paper: What is the origin of the debt? Any decent scientist finding a relationship between two actions would then ask: Can the nature of either of the two actions be responsible for the found relationship of the two actions.
This current paper is based on their “debt intolerance” theory and namely in emerging markets. Well, emerging markets are not mature economies. Based on the 2005 World Bank report on where wealth comes from, such economies are making money from raw material. They are selling their minerals either via mining or agriculture. When you consider the info in “The tax free tour” and the giveaways of taxes, we’re talking national debt as a result of extractive market activity. That is, outside entities “collecting rents”. In not so polite terms, looting.
That possibly being the case, and there are many such experiences dating back to the Spanish finding South America or any empire building enterprise (which today has to include multi national corporations) telling a nation to cut in order to pay (austerity) is just play ludicrous.
Why has not the opposition to this report within the economic profession not looked at R & R in such a way. It’s not just about their data and manipulation, it’s about their entire lack of properly implementing the scientific model of discovery. There is no specific mention in their paper as to the actual limitation and sources for error and omissions that are standard scientific writing. There is no (ok, virtually nothing) questioning as to the relationship found and why it might be there and thus what the next line of study they would take.
well, since i have no reputation to protect, i can say clearly that it was fraud. they just didn’t expect anyone to check their work. and they nearly succeeded.
there is more about this in rj eskow’s piece http://blog.ourfuture.org/20130418/the-spreadsheet-scandal-kills-the-last-argument-for-obamas-social-security-cut
i think a reasonably careful reading of this would suggest that geithner was either trying to snow (lie to) the reporters, or
these people have convinced themselves that Social Securty “really does contribute to the deficit” because the only way to pay the money owed to Social Security (and keep it solvent for another twenty years) is to “borrow it on the market.” that is, it is the only way other than raising real (income) taxes, and we know we can’t do that.
so think a minute… we are going to “lower the deficit” by stealing the money from the grannies who paid their social security tax on the promise that they would get an adequate pension when they were too old to work.
lies and stealing are “business as usual” for these people.
i should add two points.
first, eskow does not appear to think he was being lied to. i do. and i think i understand the psychology of that.
second.. even raising the “real” tax would not be the only way to avoid going to the “market” to get the money to repay the money borrowed from the Trust Fund. An immediate increase in the payroll tax of about one percent would avoid having to repay the Trust Fund. this would not be a real injustice as long as the people paying the increased tax would get the benefits they are paying for…. that is, Social Security’s retirement age and replacement ratio remain as they are without means testing or other gimmick that would destroy Social Security in order to ‘save it’ (in name only.) it would also help to raise the cap a bit…AS LONG AS those people now above the cap would then get increased benefits that represented a fair return for their money… they wouldn’t like it at first, but by the time they retired they would almost certainly be glad for the increased retirement income.
third: as far as i can see the people making policy DO NOT UNDERSTAND Social Security. this is not remarkable. apparently when you are very brilliant you don’t have to think hard about anything.
oh, and so obvious it goes without mentioning… but shouldn’t.
the honest way to “lower the deficit,” including the debt owed TO Social Security, would be to simply raise general taxes until the deficit is no longer a factor in political “debate.”
contrary to conventional wisdom (we’ve seen how THAT works) this would not deepen the recession. we GOT this recession by cutting taxes and regulations on banks.
losses due to bank actions are far in excess of any differences in tax rates that would be needed.
Dale,
Other than the spreadsheet they did the same thing Friedman and Schwartz did in their struggle to prove monetarism and justify use of its theories.
”…’simply incredible’ manipulation of official data”
http://news.google.com/newspapers?nid=1301&dat=19831216&id=1_5jAAAAIBAJ&sjid=7-YDAAAAIBAJ&pg=6761,6255871
Economics has -become- far too politicized, [and not only the last decades].
”At the time F&S’s Monetary History was published in 1963, very few people thought the Fed was responsible for the Great Depression. It was the heyday of Keynesian economics, when investment instability was viewed as a more significant problem than central bank incompetence. And the Fed had dramatically increased the monetary base and cut the discount rate to a very low level during the early 1930s, so monetary policy certainly didn’t seem contractionary. Yet within two decades F&S had convinced most of the profession that the Fed, or at least monetary policy broadly defined, was to blame for the Great Contraction of 1929-33, and to a lesser extent the 1938 depression as well. How did this happen?
Like most economic histories, F&S had an ulterior motive—their goal was not merely to re-evaluate the Depression, but also to provide persuasive evidence for their (monetarist) approach to contemporary policy issues. I think most people would agree that they failed in their attempt to displace Keynesianism with monetarism. Today, relatively few elite macroeconomists call themselves monetarists. On the other hand (as Brad DeLong pointed out) new Keynesian economics did incorporate some monetarist insights. But one insight that did not get included was the view that the monetary aggregates were the proper indicator of the stance of monetary policy—which is the single most important argument in the Monetary History. So we still don’t know why the book was so influential.”
”Meanwhile, as social security is cut to starvation levels, the very rich will be enjoying a 5 per cent tax cut from April. By this point, people like me who point and squawk at social injustice for a living have repeated phrases such as “it’s one rule for them and another for the rest of us” until the words begin to lose all meaning. By this point, nobody’s pretending any more.
There may, in recent memory, have been a time when it was modish to pretend that Britain was a land of opportunity where class was an outdated concept and poverty merely relative, but that time is over. Most of us know far too well that we’re living in a staggeringly unequal society, one where the gulf between rich and poor is growing wider year on year. Parents have begun to resign themselves to the idea that their children will grow up to be poorer than them; young people leaving school are gently abandoning the idea of a stable home, a secure job and a decent wage. Why do we continue to accept this situation?
We put up with it in part for the same reason that our politicians feel it entirely appropriate to request a 32 per cent pay rise in the middle of a double-dip recession: because of a new morality of money and power that justifies inequality. …
…
You don’t need an in-depth grasp of post-Fordist economics to get this. The single mum sobbing in the benefits office may or may not have had the time to read Milton Friedman’s Capitalism and Freedom but she has internalised its logic, and so have the rest of us: the idea that the free market, despite all evidence to the contrary, rewards everyone justly and therefore we all deserve what we end up with.”
http://www.newstatesman.com/uk-politics/2013/01/why-do-we-accept-status-quo-why-frankly-isnt-parliament-square-fire
thanks juan.
i am not well educated about “economics,” but by coincidence i did go to graduate school at UMass Amherst, where they did teach us to be careful about doing bad research. Apparently they don’t do that at Harvard.
just to finish my above rant:
another way to avoid having to increase the deficit to pay back the Trust Fund (please note, pay BACK. SS did not increase the deficit, and would only “increase the deficit” in the future if they count borrowing from someone else as increasing the deficit, while paying their debts is not decreasing their debt if they can cheat granny out of the money they borrowed from her)… another way to pay for Social Security in the future is to raise wages.
I don’t talk about this much, because it is not going to happen. The people who are trying to kill Social Security have already killed wage raises for the working class. And I am afraid that all the good intentioned leftists will spend all of their time and energy and political capital calling for “wage increases” while the bad guys go about killing SS, when they could stop the bad guys simply by making it clear that the workers can, and would, pay for it themselves. It’s still the best Deal workers have ever had… or are likely to have.