Rogoff and Reinhart’s Screw-Up May Undercut Austerity

So, now it seems that the paper heard ‘round the world—the 2010 study by Kenneth Rogoff and Carmen Reinhart that said economic growth goes negative when debt gets too big—was deeply flawed.

Prof. Carmen Reinhart in 2009. Flickr/Boston Book Festival.

Prof. Carmen Reinhart in 2009. Flickr/Boston Book Festival.

The two researchers, now both Harvard professors, wrote in a working paper that average real GDP growth was -0.1% in 20 advanced countries whose debt reached 90% of GDP from 1946 to 2009.

That created a powerful argument for austerity, as many countries’ debts had ballooned in bailing out banks during the financial crisis. Rep. Paul Ryan has cited the two in his own “Path to Prosperity” 2013 budget.

But when one grad student and two professors at the University of Massachusetts Amherst—Thomas Herndon, Michael Ash and Robert Pollintried to replicate Rogoff and Reinhart’s findings,  they discovered several fundamental errors, which they exposed and corrected in an eye opener  of a paper:

We…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….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 (italics added).

They go on to say that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower,” criticizing Rogoff and Reinhart’s claim that “public debt loads greater than 90 percent of GDP consistently reduce GDP growth.”

The three UMass researchers aren’t accusing Rogoff and Reinhart of cooking the books, just (implicitly) of sloppiness on a monumental scale. Mike Konczal had the best explanation of what they did wrong, but it boils down to data mining, not weighting certain countries’ data properly and, get this, an Excel spreadsheet that didn’t update data.

In a response posted early Wednesday morning, the two copped to their Excel mistake, thanked the UMass researchers (poor cousins of Harvard though they are) and humbly vowed to “redouble our efforts to avoid such errors in the future.”


But they took umbrage at insinuations they “manipulated the data to exaggerate our results,” saying that subsequent research produced consistent outcomes–public debt above 90% of GDP is associated with one percent slower GDP growth, and can last for years, “with massive cumulative effects.”


Prof. Kenneth Rogoff in 2010. Photo: Flikcr/Canada 2020

Prof. Kenneth Rogoff in 2010. Photo: Flikcr/Canada 2020

Still. it’s not negative growth, which is a big difference.  Quartz’s Tim Fernholz reported that Rogoff and Reinhart met with 40 senators in April 2011 and when Sen. Johnny Isakson (R-Ga.) asked “do we need to act this year?,” Rogoff answered, “Absolutely.”  “Once you’ve waited too long, it’s hard to take radical steps,” Rogoff said later.


That was just months before the debt ceiling debacle in the House of Representatives over this very issue.


Critics like Nobel Prize-winning hyper-Keynesian Paul Krugman and progressive economist Dean Baker have argued that slower economic growth causes higher debt, not vice-versa. Krugman also grumbled about the limited data set in the original Rogoff and Reinhart paper, so he can now say his four favorite words: “I told you so.”


But to me the debate is really about long-term debt, not some abstract percentage of GDP. The big issue is the retirement of the Baby Boomers and the looming disaster of Medicare, whose unfunded liabilities could approach $40 trillion if medical expenses continue to increase at recent rates. That, and inevitably rising interest rates, would suck all the oxygen out of the room.


So, I think Congress and the president should focus on a multiyear plan to restructure Medicare starting in 2023, and set it in motion now while interest rates are near zero. They’ve done the exact opposite, however, cutting discretionary spending by $3 trillion while not addressing the hard long-term questions. 


If the Reinhart/Rogoff dispute accomplishes one thing, it should be to move current budgetary issues out of the emergency room. This is not a heart attack, but a treatable form of cancer, and we need a long-term plan to cure it.

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