Reinhart & Rogoff versus their critics (contd.)
As I said, Colbert's presentation is not to be missed. But of course the real damage to the conclusions of Reinhart & Rogoff's influential (and now notorious) 2010 paper, "Growth in a Time of Debt", was done by an economics graduate student at UMass Amherst, Thomas Herndon. Herndon discovered that R&R's analysis in that paper had serious errors, and then he and two tenured economists, Michael Ash and Robert Pollin, wrote a systematic critique: "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff".
=> Some of R&R's responses to this bombshell can be found here & here. A careful (and concise) counter-response by Herndon is here. Parts of the discussion in Herndon's piece are technical, but the main thrust should be clear enough to anyone who reads it carefully. And Herndon's closing paragraph, about the real-world policy implications of this debate, zeroes in on the crucial issues in a compelling way.
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.
Amen. And here are some pithy comments from Paul Krugman:
OK, Reinhart and Rogoff have said their piece. I’d say that they’re still trying to have it both ways, on two fronts. They deny asserting that the debt-growth relationship is causal, but keep making statements that insinuate that it is. And they deny having been strong austerity advocates – but they were happy to bask in the celebrity that came with their adoption as austerian mascots, and never to my knowledge spoke out to condemn all the “eek! 90 percent!” rhetoric that was used to justify sharp austerity right now. Sorry, guys, but with so much at stake you have a responsibility not just to put stuff out but to make crystal clear what you think it implies for policy. [....](Read the rest, too.)
=> Some closing reflections: It's important to emphasize that Reinhart and Rogoff are not hacks or propagandists, but major scholars. Their book on the history of financial crises, This Time is Different, is widely considered a "masterpiece", even by severe critics of their 2010 paper. Nor can they just be dismissed as dogmatic ideologues (unlike, for example, some prominent Chicago-style economists with Nobel Prizes who have made high-profile interventions in public debates over economic policy since the crash of 2008).
As I wrote to a friend in an e-mail exchange earlier today, those factors help to make this whole incident both more embarrassing and more instructive than it might otherwise be. We all make mistakes (even serious major scholars), and we are all susceptible to making mistakes in directions that accord with our preconceptions.
P.S. Some usefully pertinent remarks by Akos Rona-Tas (which I just noticed on Facebook):
Here is Rogoff and Reinhart's response. I find it a bit disingenuous that they protest the politicization of their findings. Both Rs are very proud of their political influence judging from their web pages. It is also not a smart thing to rewrite one's past opinions in the age of the internet. Yes, they did say that 90 percent is an "important marker," and yes, they did say that the main direction of causation is debt-to-growth and not growth-to-debt. An example:By the way, R&R are not entirely wrong when they assert that some of their policy recommendations since 2008 have diverged from the more extremist versions of Tea Party economics that now predominate among the Congressional Republicans and pervade the right-wing propaganda machine. But (a) that's not really the point, and (b) it simply helps to demonstrate how deranged the current hard-right consensus on economic policy has become.
They also forget to mention that while "several researchers have elaborated upon" their findings some of those also turned out to be wrong. Alesina and Ardagna's piece, e.g, was clobbered by the IMF.