Of Reinhart & Rogoff & the Emperor’s New Clothes

The brutal smashing that Reinhart and Rogoff’s work has taken in the past 24 hours, was inevitable even without the catalogue of serious methodological errors in their paper.

Reinhart and Rogoff’s empirical result posited a clear threshold. Reinhart and Rogoff were clear that  debt-to-GDP ratio above 90% spelled doom for growth. The actual data is far less clear:

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There is some correlation, but that correlation was loose enough to suggest that this was just one factor of many, and it never said anything at all about whether high debt caused low growth, or low growth caused high debt, or whether some exogenous factor was causing both. The real questions are all about causation.

Far from being a magical no-growth threshold, the UK experienced some of its strongest growth at a public debt level above 90% of GDP, suggesting very strongly that there are many other factors in play. In general, I would tend to caution against the use of arbitrary thresholds to establish principles in economics, whether that is the debt level necessary to lower growth, or the leverage level necessary to trigger a bank run, etc. The evidence suggests these almost certainly vary on a case-by-case basis.

Of course, much of the pro-austerity case seems to have been built on Reinhart and Rogoff.

Olli Rehn of the European Commission defended austerity as follows:

[I]t is widely acknowledged, based on serious research, that when public debt levels rise about 90% they tend to have a negative economic dynamism, which translates into low growth for many years.

Paul Ryan defended austerity using the same criteria:

Economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth and intensifies the risk of a debt-fueled economic crisis.

Timothy Geithner too:

It’s an excellent study, although in some ways what you’ve summarized understates the risks.

Lord Lamont of Lerwick (an adviser to David Cameron) agreed:

[W]e would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.

Doug Holtz-Eakin, Chairman of the American Action Forum:

The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth.

This all feels very much like a case of the Emperor’s New Clothes. Those shining robes that cloaked the austerian case for austerity now and at-all-costs were based on serious methodological errors — as opposed to more nuanced criteria for fiscal consolidation during the boomtime, when interest rates on government debt exceed the unemployment rate. All those serious people who praised Reinhart and Rogoff’s seriousness clearly didn’t read it very well, or study the underlying data. Much more like they formed an opinion on the necessity of austerity now, and looked around for whatever evidence they could find for their preconception, whether Reinhart and Rogoff, or Alessina and Ardagna.

The fact that Reinhart and Rogoff did not, and are still not prepared to issue some clarification to their study to prevent its abuse by austerity-obsessed policymakers is sad given the copious evidence that austerity under present conditions is self-defeating. The fact that their response has so far consisted of defending their very weak conclusions — in full knowledge of the political implications of their work, and how it has been used to justify harsh austerity in very slack economic conditions — is very sad indeed.

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89 thoughts on “Of Reinhart & Rogoff & the Emperor’s New Clothes

  1. I love this comment

    [W]e would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.

    Nothing to do with Japanese banks not dealing with their bad debt – they govt simply borrowed too much…

  2. and that one is awesome also of course:

    The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message [...] Entering the zone means slower economic growth.

    Not even R&R ever pretended that there was a causation. You see what happens when you allow politicians and other public leaders quote scientific work. There should be some kind of regulation….

    • Yes, it looks increasingly likely to me that Reinhart and Rogoff’s rhetoric sounds austerian because their theoretical framework on debt is austerian.

  3. R&R constraints would only ever apply in a hard money context. “Paying debts back? Without printing it up? Are you mad? No one does that these days.”
    My only concern about the anti-austerity drive is it is pro big govt spending. That’s a problem because as the govt spends more the private economy reconfigures to serve it so dependency increases; how do you escape that feedback loop?
    Of course you could avoid that problem by dumping £10k into everyone’s bank account and say spend in one year or it goes. That would stimulate demand! Of course it would reveal something to the common man about what money is (i.e. nothing but a figment of imagination) which I suspect govt would prefer to keep hidden. Plus it makes them feel big and powerul when spending loads of dosh…

        • Yeah, beyond “war” as an answer although doubtless someone in the White House is pondering that one….but seriously, you really believe that a modern Govt can/will act responsibly and cut their spending in a boom?

          1. Gordon Brown didn’t even recognise we were in a boom during the bigggest boom post war.
          2. If/when recognised as a boom, with the “spivs” are all making money in this boom you suggest that the govt will wear a “hair shirt” and deny it’s workforce the fruits of “hard won success”.

          I would call that naive; in my opinion, govt’s will spend every penny they think they can get away with. Conservatives feel constrained by their voters desire for fiscal responsilibity – Labour, when they get in, will have a printfest for their benefactors.

          Say it ain’t so…

        • If they don’t act responsibly then they will have major problems again in the bust. I think the whole Gordon Brown “beyond boom and bust” stuff is widely recognised as bullshit. Booms and busts are a fundamental part of the human condition.

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  5. “The fact that Reinhart and Rogoff did not, and are still not prepared to issue some clarification to their study to prevent its abuse by austerity-obsessed policymakers is sad given the copious evidence that austerity under present conditions is self-defeating.”

    The key to success in academia is honing one’s skills of convoluting the truth to the extent where it serves two interests, first and foremost, it must pass muster in the academic community, and secondly, it must serve the Elite’s interests.

    Otherwise, it could contain not a shred of truth. Most of academia is just like this, TOTAL bullshit. That rather harsh reality aside, re-allocating capital in this system is [obviously] what needs to happen.

    Austerity is just another code word for stealing. That what this system has ALWAYS been about since central banking came into fashion. This [debate] is not only another way to steal, but, as importantly, an accepted method to distract people from this fact [intellectual bullshitting].

    It’s just like people ALWAYS talking about money instead of what money represents. THIS is why people get so confused. Economics is about the relationship between one producer and one consumer. Everything else distorts this relationship, simply adding layer upon layer of non-sense until we get to the point where there is little left to steal.

  6. Pingback: Debt and growth: Revisiting Reinhart-Rogoff | The Economist « Dr Alf's Blog

  7. This site no longer loads properly on my iPad. The paragraphs overlap the images. The new format is a step backwards in my opinion.

    • Thanks for letting me know.

      The reason I switched format was because the old one was randomly corrupting. I will try a few things to fix this.

      • Works now. Recently all the images on my blog disappeared. Blogger cannot tell me why. 4 years of writing and making charts gone overnight.

        So your situation could have been worse.

  8. Pingback: Reinhart and Rogoff: replication and responsibility | Alex's Archives

  9. Pingback: How a student took on two Harvard economists over their pro-austerity study — and won | digger666

  10. Pingback: Why the R&R flap will not silence Austerians « J.uris D.ebtor

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