Free FallingCarmen Reinhart and Ken Rogoff came as close to celebrity status as an economist can ever come, with their book, “This Time Is Different”. They claimed that 800 years (!) of financial history proves that high government debt ratios lead to low economic growth. Governments all over the world took heed and downsized, adopting austerity that cost millions upon millions of workers their jobs. But it was all a lie. Yes, a lie. Screwed up their data analysis. Like so many times before, think of Larry Summers at Harvard, Chicago’s Gene Fama, or Charles Plosser at University of Rochester, the economists reach results counter to intuition and real world. Their work doesn’t pass the smell test: if it smells like nonsense it probably is nonsense. Yeva Nersisyan (my brilliant student+coauthor) and I critiqued their book after came out: To put our conclusions as simply as possible, we concluded that they didn’t know what they are talking about. They argued that “high” government debt ratios, say, 90% of GDP, nearly invariably lead to slow growth and to financial crisis. Our debt hysterians took that and ran, using their book as justification for austerity. We noticed that their data just did not add up. Leave to the side silliness of simply aggregating across 8 centuries of experience, and adding up debt ratios of countries as disparate as the USA today or, say, Greece in 1932, let alone some feudal state operating on a gold standard a couple of hundred years ago. As I’ve remarked, any real historian would find the methodology ludicrous. More importantly, they have no idea what sovereign debt is. They add together government debts issued by states on gold standards, fixed exchange rates and floating rates. They aggregated across governments that issue debt in their own currency and states that issue debt denominated in foreign currency. Not even possible to determine from their book exactly what is government debt versus private debt. When we couldn’t make sense of their results, Yeva wrote to them to get the data. After all, their book touted their contribution to good research by proclaiming they were accumulating all this data for the good of humanity. They ignored our request. I have heard from several other researchers Rogoff and Reinhart also ignored their repeated requests for the data. So, finally, someone was able to obtain the data. And as we suspected, it did not add up. Rogoff and Reinhart committed the cardinal sin of academics: while their purported results fit their theory, data they supposedly used does not. Either they fudged or they erred. It really doesn’t matter. Their results were completely, utterly wrong. And their own data proves it (…..)



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  1. Holy Snikes, this is HUGE, from Mike Konczal: “In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, “Growth in a Time of Debt.”Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact. This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Post editorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren’t releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right – it couldn’t be done.” The three criticisms of Reinhart and Rogoff: 1. They selectively exclude years of high debt and average growth; 2. They use a debatable method to weight the countries; 3. A coding error that excludes high-debt and average-growth countries. All of these bias the results towards their conclusion. If this is verified, it will be the biggest academic snafu since Professor Jeremy Siegel messed up his book Stocks for the Long Run relying on bad data.

    This does not justify running huge deficits, but it also removes all of the urgency of the Austerity camp. A much more slow form of de-leveraging – what Ray Dalio calls “the Beautiful de-leveraging” — and not austerity is what appears to be what is called for…

    I am watching this closely…

  2. The Reinhart and Rogoff rolled through the internet today like a tsunami. Peter Coy at Bloomberg: The point and counterpoint of academic debate that once occurred over months or years has been compressed to mere hours by social media. Today the Twitterverse exploded with chatter about a new research paper claiming to find holes in a landmark academic paper that’s been cited to justify extreme austerity measures. By mid-afternoon the authors—Harvard economists Carmen Reinhart and Kenneth Rogoff—had emailed reporters a quick reply defending their work. I first saw the Mike Konczal’s post. More excellent commentary came from Tyler Cowen, Dean Baker,Jared Berstein, and FT Alphaville. Joe Weisenthal reminded us on Twitter that he was never an RR fan. While some like Cowen argue that the case for austerity did not rest on Reinhart and Rogoff themselves, Tim Fernholtz has an impressive list of policymakers who use the paper as what they see as clear and convincing evidence for austerity now (…..)

  3. In this age of information, math errors can lead to disaster. NASA’s Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan Chase’s “London Whale” venture went bad in part because modelers divided by a sum instead of an average. So, did an Excel coding error destroy the economies of the Western world? (…..) Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.” In response, Ms. Reinhart and Mr. Rogoff have acknowledged the coding error, defended their other decisions and claimed that they never asserted that debt necessarily causes slow growth. That’s a bit disingenuous because they repeatedly insinuated that proposition even if they avoided saying it outright. But, in any case, what really matters isn’t what they meant to say, it’s how their work was read: Austerity enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact and a reason to slash government spending even in the face of mass unemployment.

    So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs (…..)

  4. tom mcmahon: People who act as if debt is a demon have not studied our economic history very well, as a matter of fact they’ve not studied it at all.

  5. Professor Uziel Nogueira says: I do not buy the ‘spending is good’ idea. However, I do agree with Prof PK in one point. As long as the global economy keeps taking the greenback (they have no other choice), US policy makers have greater latitude on the level of public debt. The question of debt in the US context is not financial. Interest rates on the federal debt are not in danger of going to the roof now or in the near future. The problem of debt is geopolitical. As Lawrence Summers once said, how long can the largest debtor nation in the world be the sole military superpower?


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