Reports from the Economic Front

a blog by Marty Hart-Landsberg

Politics In Command

If you were one of those people who were not persuaded that the U.S. debt level was reaching growth-threatening levels, pat yourself on the back.

One of the major studies supporting the austerity position was a 2010 paper titled Growth in a Time of Debt by two well-known economists, Carmen Reinhardt and Kenneth Rogoff (R & R).  As Mike Konczal reports:

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 conclusion, that countries with debt-to-GDP ratios over 90 percent actually suffer negative growth, quickly became a staple in the arguments of those pushing for cuts in government spending.

Well, it turns out that R & R’s work was seriously flawed.  Once the flaws are corrected, the conclusion no longer holds; growth remains positive even at debt ratios over 90 percent and the difference in growth rates for countries below and above that level is not statistically significant.

R & R finally agreed to share their data with three professors from the University of Massachusetts at Amherst, Thomas Herndon, Michael Ash, and Robert Pollin (HAP).  HAP published their evaluation of R & R’s work in their recently published paper titled Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.”  As Konczal summarizes, HAP found  three serious problems with R & R’s work:

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.

You can read Konczal or Michael Roberts for a fuller discussion of these points.  However, just to give you a flavor of how poor R & R’s methodology was, let me briefly summarize the second point.  R & R divided up each individual country’s data into several selected debt-to-GDP groupings, and then calculated an average real growth for all the years in the specific debt grouping.  Then they determined a global average rate of growth for a given debt-to-GDP level by averaging all the growth rates across countries at that specific debt level.

Konczal gives the following example to illustrate how sloppy this approach is:

The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.

Now maybe you don’t want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don’t discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.

As noted above, after HAP adjust for the errors they found, which include an Excel spread sheet error, R & R’s conclusion of negative growth at debt levels over 90 percent goes away.  More specifically, they found that “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 [R & R claim].”

Now, have R & R backed off from their conclusion? Well, they admit the mistakes but still claim that the basic point is true.  But as Dean Baker notes: “If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.”

What we have here is politics in command.  R & R, as well as other advocates of austerity, continue to argue for cutting government spending despite having based their position largely on a study that is now shown to be wanting.  So, it goes.


2 responses to “Politics In Command

  1. Dylan Gleason April 21, 2013 at 8:26 pm

    Unfortunately, I don’t think the commendable work by Herndon and company will make much of a dent in the overall narrative. As you pointed out, the normative bias towards austerity in “mainstream” policy circles precludes any kind of serious concern with the data. A case in point would be this typical response by a Daniel Shuchman at Forbes, where the author essentially offers this facile response: “the modern urge to demand an academic study to ‘prove’ or justify inherently complex and ambiguous decisions is antithetical to clear thinking.” You don’t say? And I imagine that “clear” entails dramatically reducing deficit spending effective immediately, because naturally that is the “logical” thing to do?


  2. Mark Johnson '75 April 30, 2013 at 11:03 am

    Just curious – in your view, are there any theoretical limitations to the level of government debt? If so, what are those limits? Why?


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