Friday, April 26, 2013

Stephen Colbert takes down a key scholarly foundation for austerity economics

Before we get to Colbert's account of this scholarly and public-policy mini-scandal, which is not to be missed, here are some highlights from Mike Konczal's more sober summary:
In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, "Growth in a Time of Debt." [....]
  Their main finding was that when countries have a level of public debt over 90% of GDP, they hit a kind of fiscal cliff.  Their economic growth slows down significantly.
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." [....]
This 90% figure has been used as a scary hobgoblin to support contractionary economic policies based on debt hysteria in both the US and Europe.   If the 90% threat is so drastic, then avoiding it should be the most urgent priority, and it's vital to start slashing government spending and taking other steps to reduce government deficits immediately.  (Or else we'll turn into Greece!)

One response to Reinhart & Rogoff, Konczal notes, "has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios."  And in some cases that's probably part of the story.

But it turns out that there's also a more basic problem with their analysis.  The numbers were wrong.  This complication was discovered by a graduate student at UMass Amherst, Thomas Herndon, and then he and two of his professors published a paper demonstrating it.
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 [...] 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. [....]

=> Colbert's presentation is livelier and funnier.  This video clip is worth watching in full, but the substantive heart of the matter starts around 3:54.

For Colbert's follow-up interview with Herndon, see here:

And for some of the continuing polemics, see here & here & here.

[UPDATE  Also here & here.]

—Jeff Weintraub