Econintersect: Harvard professors Carmen Reinhart and Kenneth Rogoff have written another response to the furor that has erupted over the analysis of their paper "Growth in a Time of Debt" which was published in the American Economic Review in May 2010. The analysis was performed by Thomas Herndon, a graduate student at the University of Massachusetts, Amherst, and published 15 April 2013 by the Economy Policy Research Institute at that university.
The latest response from Reinhart and Rogoff (RR) appeared as an Op-Ed at The New York Times, 25 April 2013.
RR repeat and elaborate on some of their earlier statements. Notable among their comments:
- "...that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum."
- "They (UMass economists) correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II."
- "...they also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics — charges that we vehemently dispute."
- "...we find these attacks (made on us in the media) a sad commentary on the politicization of social science research.
- "Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon."
- "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."
- "Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested."
- "The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle."
- "Austerity seldom works without structural reforms — for example, changes in taxes, regulations and labor market policies — and if poorly designed, can disproportionately hit the poor and middle class."
- "Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists."
It seems clear that RR have been abused by some of the proponents of austerity when they (austerity proponents) zeroed in on the "magic" 90% threshold. It is unfortunate that their commentary on the "softness" of that benchmark has only been heard after the data supporting it was found to be lacking. In fact the 2010 paper reviewed concludes with a statement that indicates any concerns about withdrawing stimulus were secondary. The final statement in RR (2010):
"At the very minimum, this would suggest that traditional debt management issues should be at the forefront of public policy concerns."
Was such a summary statement, without qualification, the equivalent of yelling "Fire!!" in a crowded theater?
The statement they make decoupling the rise of debt as a result of the business cycle is lame. They attempt to dismiss economic slowdowns causing high debt is based on the long duration of period of high debt associated with economic downturns. This is a non sequitur. The question of causation can only be addressed by determining the order of events leading into the condition of high debt and slow (or negative) growth. The obvious logical deficiency of their argument about causation diminishes the credibility of the rest of their Op Ed. RR simply have never addressed the question of causation.
But it can be inferred they assumed the cause and effect. From RR (2010):
"The nonlinear effect of debt on growth is reminiscent of “debt intolerance” (Reinhart, Rogoff, and Miguel A. Savastano 2003) and presumably is related to a nonlinear response of market interest rates as countries reach debt tolerance limits. Sharply rising interest rates, in turn, force painful fiscal adjustment in the form of tax hikes and spending cuts, or, in some cases, outright default."
This discussion still has a long way to go. It will be helped by a companion "appendix" to the NYT Op Ed "Reinhart and Rogoff: Responding to Our Critics" which gets into more analysis and public policy details in which RR have been involved. The involvement of these two in the political economy discussions over the past several years has been quite complex. It is a shame that this relatively minor part of their work has become a focal point that detracts from all the rest.
However, this commentator will not hold them blameless. They did use unfortunate assumptions (not clearly identified as such, see examples above) and allowed use of their work to be misused (even abused) by political figures without sufficient effort to clarify a proper interpretation. Of course, that proper interpretation may have been evolving over the intervening time period - and they may still be sorting it out.
- Debt, Growth and the Austerity Debate (Carmen M. Reinhart and Kenneth S. Rogoff, The New York Times, 25 April 2013)
- Reinhart and Rogoff: Responding to Our Critics (Carmen M. Reinhart and Kenneth S. Rogoff, The New York Times, 25 April 2013)
- Global Economic Intersection articles about Reinhart and Rogoff.