Economics Takes Some R & R
I keep running across both attacks upon – and spirited defenses of – Carmen Reinhart and Kenneth Rogoff, who were embarrassed when a graduate student at Amherst found a serious error in their math. No one is arguing that they weren’t wrong, but many are arguing whether they were wrong about anything important. Like whether promoting austerity during the great recession was a good idea.
Over at Econbrowser, James Hamilton posted, The contributions of Reinhart and Rogoff:
To briefly summarize the facts that you’ll find developed more fully there, some researchers at the University of Massachusetts have challenged one tiny detail of one follow-up study by Reinhart and Rogoff having to do with an issue that I have yet to even mention so far in today’s discussion. That dispute concerns a measure of the correlation between sovereign debt levels and GDP growth. I say it is a tiny detail, because the dispute is completely restricted to just one of six different summaries of three different data sets in that one particular paper. The Massachusetts researchers correctly noted that there is an error in the spreadsheet which, if corrected, would have changed the number Reinhart and Rogoff should have reported for that one statistic by a few tenths of a percent. Bigger changes in that one statistic could be obtained if one adds some additional data and makes what I regard as a questionable change in methodology, but even with all the changes they want to make, the results preferred by the University of Massachusetts researchers are in fact very similar to the other 5 dataset summaries that will be found in Reinhart and Rogoff’s original paper, as well as a subsequent analysis of expanded data that Reinhart and Rogoff published in 2012 (which again the Massachusetts scholars did not mention or discuss).
Whereas at The New Yorker, John Cassidy posted, The Reinhart and Rogoff Controversy: A Summing Up:
… Addressing a new paper by three lesser lights of their profession from the University of Massachusetts, Amherst, which uncovered data omissions, questionable methods of weighting, and elementary coding errors in Reinhart and Rogoff’s original work, and which went around the world like a viral video, the Harvard duo dismissed the entire brouhaha as “academic kerfuffle” that hadn’t vitiated their main points.
Really? Even somebody living in a bubble stretching over Harvard Yard would have difficulty believing that. For all of the illuminating work Reinhart and Rogoff have done on the history of financial crises and their aftermaths, including their popular 2011 book “This Time Is Different: Eight Centuries of Financial Folly,” their most influential claim was that rising levels of government debt are associated with much weaker rates of economic growth, indeed negative ones. In undermining this claim, the attack from Amherst has done enormous damage to Reinhart and Rogoff’s credibility, and to the intellectual underpinnings of the austerity policies with which they are associated. In addition, it has created another huge embarrassment for an economics profession that was still suffering from the fallout of the financial crisis and the laissez-faire policies that preceded it. …
Update20130507: Back at Econbrowser, after a lot of pointless attack and counterattack, commenter Tom offers a balanced comment:
R&R’s critics make one fair point that R&R should more explicitly concede: they wrongly promoted and failed to contradict others who promoted the mistaken belief that empirical data supports the notion of a growth cliff after 90% debt/GDP, based on one flimsy calculation that was contradicted by most of their own data and calculations. The fact that they themselves were the ones who collected and first published the data that others are using to call them out for promoting and failing to contradict others who promoted the concept of a threshold at 90% debt/GDP doesn’t excuse that misdeed.
However, the false dogma of a 90% threshold is not the real target of R&R’s critics. They are exploiting that mistake to attack R&R’s two much more important contributions.
The first real target is the completely legitimate and well-supported empirical finding that, on average, countries with higher public debts grow significantly more slowly than countries with lower debts. This finding can’t be contradicted with facts, so R&R’s critics are instead trying to wreck their reputation. The Excel spreadsheet error was a real goldmine for R&R’s critics in this regard.
The other real target of R&R’s critics is their very well backed-up argument that when a belief becomes widespread that age-old economic rules of thumb no longer apply and “this time is different,” that belief is almost certainly wrong. (Unless, say, you happen to be living at the beginning of the industrial revolution.)
Ultimately, R&R’s critics are making a claim that “this time is different”. And, as usual, there are some reasons to believe it could be, at least in the developed world. Graying demographics, private over-indebtedness and investor skepticism of growth potential have altered how developed economies respond to fiscal and monetary stimulus, allowing governments to run larger deficits with less consumer price inflation and lower interest costs.
JDH rightly pointed out the fatal flaw in HAP’s argument, which actually applies equally well to Krugman. They suppose that larger deficits could restore developed economies to healthier growth and thus greater investor confidence. But they push from their minds the corollary that in such a scenario, developed economies would return to the normal situation in which fiscal and monetary stimulus produce larger inflationary responses. That return to greater inflation response is what lies behind the Fed and CBO and other projections that with recovery will come higher interest rates.
There’s also the case of Japan, where large fiscal deficits and monetary stimulus have so far failed to produce recovery. I tend to see our fate being closer to Japan’s experience than the Fed and CBO forecasts. Fiscal deficits produce one-off additions to growth, and only while deficits are being increased. Those one-off additions do nothing to help and probably hurt sustainable growth. Maintaining high deficits is not stimulus. Any reduction of deficits, even if they remain high such as recently in the US and UK, is counter-stimulative fiscal drag. I see no reason to believe fiscal stimulus helps the long run.
It’s not a coincidence that R&R are career analysts of emerging markets, while Krugman and HAP have focused on developed markets. Emerging markets continue to have high inflation responses to fiscal and monetary stimulus. There are numerous examples of emerging markets that pursued fiscal austerity and saw investor confidence and growth revive as a result. Granted it’s much quicker and easier when the country pursuing fiscal austerity is small and not surrounded by others doing the same.
While I can certainly understand the belief that too much debt is bad, I can’t help but notice that no party ever voluntarily reduces spending when in power. They cry, “austerity!” to stop funds from flowing to their perceived enemies and the weak, while maintaining or increasing the flow of funds to their perceived allies and the strong.