Reinhart and Rogoff are WRONG!
How Much Unemployment Was Caused by Reinhart and Rogoff’s Arithmetic Mistake?
Dean Baker, Center for Economic and Policy ReSearch
Tuesday, 16 April 2013 09:49
Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.
There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.
Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.
Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting.
But HAP (Herndon, Ash, and Pollin) tells us that we need not concern ourselves with any arguments this complicated. The basic R&R story was simply the result of them getting their own numbers wrong.
After being unable to reproduce R&R’s results with publicly available data, HAP were able to get the spreadsheets that R&R had used for their calculations. It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90 percent debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6 percent, compared to the -7.6 percent that R&R had entered in their calculation.
If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere. It should also cause reporters to be a bit slower to accept such sweeping claims at face value.
Holy Coding Error, Batman
Paul Krugman, The New York Times
April 16, 2013, 1:38 pm
The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policy makers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear. One was Alesina/Ardagna on the macroeconomic effects of austerity, which immediately became exhibit A for those who wanted to believe in expansionary austerity. Unfortunately, even aside from the paper’s failure to distinguish between episodes in which monetary policy was available and those in which it wasn’t, it turned out that their approach to measuring austerity was all wrong; when the IMF used a measure that tracked actual policy, it turned out that contractionary policy was contractionary.
The other paper, which has had immense influence — largely because in the VSP world it is taken to have established a definitive result — was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone “knew” that terrible things happen when debt passes 90 percent of GDP.
Some of us never bought it, arguing that the observed correlation between debt and growth probably reflected reverse causation. But even I never dreamed that a large part of the alleged result might reflect nothing more profound than bad arithmetic.
Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems.
Mike Konczal, Next New Deal
Apr 16, 2013
(T)hree main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.
This error is needed to get the results they published, and it would go a long way to explaining why it has been impossible for others to replicate these results. If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.
So what do Herndon-Ash-Pollin conclude? They find “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 [Reinhart-Rogoff claim].” [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.
Reinhart/Rogoff is the study all the Austerian politicians and pundits, Republican AND Democratic, cite to claim we have a debt/deficit problem.
Well today, with no more changes in policy at all, we no longer have a defict problem and Reinhart/Rogoff is wrong, Wrong, WRONG!
You think that will stop them?
Republicans embrace Obama’s offer to trim Social Security benefits
By Lori Montgomery, Washington Post
Apr 15, 2013 11:53 PM EDT
President Obama’s offer to trim Social Security benefits has perplexed and angered Democrats, but GOP leaders are embracing the proposal and rushing to jump-start a debate that will delve even more deeply into the touchy topic of federal spending on the elderly.
This week, two House subcommittees plan to hold hearings on “reforms to protect and preserve” programs for retirees, starting with Obama’s proposal to apply a less generous measure of inflation to annual increases in Social Security benefits.
Also on the table are higher Medicare premiums and reduced benefits for better-off seniors, and a higher Medicare eligibility age.