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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 - WP322.pdf

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.


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 toread 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 -

Robert Samuelson tries tominimize 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.

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Comment Preferences

  •  There is no Europe, just as there is no Americas (3+ / 0-)
    Recommended by:
    Roger Fox, Frank Schnittger, RichM

    I agree with the thrust of your diary.  The intellectual underpinnings of austerity have been undermined.

    But that applies to the US and the UK, countries which have preserved their monetary sovereignty.

    It has nothing to do with the countries that comprise southern Europe.

    Italy and Greece have a choice.

    Either they leave the Euro (my recommendation), or they continue on their current path.

    Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project.

    by PatriciaVa on Thu Apr 25, 2013 at 09:28:05 AM PDT

    •  The argument presented has nothing to do (1+ / 0-)
      Recommended by:

      with whether or not a country has it's own currency. The issue is that policy makers have used the fear of high debt (fanned by Reinhart/Rogoff ) to impose deflationary policies on already highly depressed economies with the result that depression and debt/GDP ratios have worsened further - as Keynesian and conventional economics would have predicted. This has been possible in the case  of Greece, Cyprus, Portugal and Ireland because those countries have difficulty funding their borrowing requirements on the open market and are thus dependent on the ECB/IMF for emergency funding. Yes they could default and leave the Euro, and the resulting devaluation might facilitate a rapid recovery - depending on how vindictive their creditors choose to be. Whether they like it or not, small peripheral economies are heavily dependent on the goodwill of their bigger neighbors for trade and investment.

      •  Yes it does. (1+ / 0-)
        Recommended by:
        Frank Schnittger

        Countries that have their own currency can have their central banks quasi-finance their respective budget deficits.

        Just glance at Japan, with debt/GDP of 230%, and paying 0.5% to sell 10-year paper.

        Countries like Italy and Greece can't, as the ECB's mandate is very different from the Fed's.

        The FED is the central bank of the US of A.

        The ECB is not the lender of last resort to the US of Europe, because there is not US of Europe.

        Furthermore, per the legal agreement between the ECB and the German people, the ECB can't be the lender of last resort to any member country.

        Why do so many Kossacks insist otherwise.  It's as if they no longer believe in the nation state, in German or Greek sovereignty.

        Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project.

        by PatriciaVa on Thu Apr 25, 2013 at 10:06:01 AM PDT

        [ Parent ]

        •  agreed (0+ / 0-)

          The Euro is causing a lot of problems for EU countries- particularly smaller countries on the periphery - in part, as you say, because it doesn't act as a lender of last resort, and in part because, unlike the Fed, it has no mandate to promote full employment. But the bigger problem is that it is difficult to persuade German taxpayers to fund Greek debts -so the problem is the opposite of what you suggest - the fact that EU member states do retain considerable sovereignty and can block transfers from better performing countries to less well performing countries - unlike the US where richer states effectively subsidize poorer states.

          Europeans have rather too much experience of the dangers of nationalism and are reluctant to unpick the peace that the EU has enabled over the past 60 years.

  •  Glad to see (2+ / 0-)

    so many people keeping this conversation going.

    We should not let go of this issue. Grab it and don't let it go.  Hammer it.  Again and again.  Keep finding more details, hammer it again.

    "Justice is a commodity"

    by joanneleon on Thu Apr 25, 2013 at 09:57:48 AM PDT

  •  Western Ownership is Taking Over the World (2+ / 0-)

    Its economic theories are nothing more than excuses and distractions.

    We shouldn't waste any more time participating in these simulated "arguments" than absolutely necessary. We're not going to change the mind of a single top owner or their employees, only the common people if we can rally enough to derail the plan.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Thu Apr 25, 2013 at 10:01:33 AM PDT

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