Proponents of austerity have repeatedly cited this paper (pdf) by economists Carmen Reinhart and Kenneth Rogoff, which found slowed growth among countries with high debt-to-GDP ratios, to make the case for cuts in government spending. Mike Konczal highlights a new study that casts some serious doubts on the strength of the Reinhart-Rogoff argument:
In a new paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadsheet. This allowed Herndon et al. to see how how Reinhart and Rogoff’s data was constructed.
They find that three 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.
Dean Baker ponders the impact of the paper:
This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment.
In the United States many politicians have pointed to R&R’s work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R’s work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.
Tyler Cowen’s view:
The “case for austerity” didn’t rest much on R&R in the first place, rather on the notion that the bills have to be paid, dawdling on adjustment is not always so easy, and the feasible sum of international redistribution is quite low. For this reason the UK should be relatively uninterested in immediate austerity and many nations in the eurozone periphery more interested.
Jared Bernstein’s addition to the debate:
I suspect R&R will say, assuming they acknowlege they messed up, that it still shows slower growth. But that’s been the problem with their work from the beginning. As I’ve written many times, riffing off of Bivens and Irons for one, if you mush everything together they way they do, you’re likely to get the causality backwards. You’ll convince yourself that higher debt leads to slower growth when it’s more often the opposite. Certainly in the US case, the most progress we’ve made against our debt ratios have been in periods of fast growth (and the biggest increases have been in periods of recession, slow growth, or war).
Part of Reinhart and Rogoff’s response:
The JEP paper with Vincent Reinhart looks at all public debt overhang episodes for advanced countries in our database, dating back to 1800. The overall average result shows that public debt overhang episodes (over 90% GDP for five years or more) are associated with 1.2% lower growth as compared to growth when debt is under 90%. (We also include in our tables the small number of shorter episodes.) Note that because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.