Lynn Stuart Parramore discusses the work of an economics grad student who recently blew the lid off Reinhart and Rogoff’s infamous study concluding that a 90% or higher GDP-to-debt ratio results in dramatic reductions in economic growth:
Since 2010, the names of Carmen Reinhart and Kenneth Rogoff have become famous in political and economic circles. These two Harvard economists wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify harmful austerity policies. The authors purported to show that once a country’s gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad.
Parramore notes that austerity advocates have used the Reinhart-Rogoff study to justify the implementation of austerity measures in multiple countries. There is one tiny problem, however: the Reinhart-Rogoff data spreadsheet contains a massive error:
Enter Thomas Herndon, Michael Ash and Robert Pollin of University of Massachusetts, Amherst, the heroes of this story. Herndon, a 28-year-old graduate student, tried to replicate the Reinhart-Rogoff results as part of a class excercise and couldn’t do it. He asked R&R to send their data spreadsheet, which had never been made public. This allowed him to see how the data was put together, and Herndon could not believe what he found. Looking at the data with his professors, Ash and Pollin, he found a whole host of problems, including selective exclusion of years of high debt and average growth, a problematic method of weighing countries, and this jaw-dropper: a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries.
What’s the end result?
In their newly released paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” Herndon, Ash and Pollin show that “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. That is, contrary to R&R, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”
I imagine that Reinhart and Rogoff are gearing up for a response. Meanwhile, Parramore also links us to Daniel Schuchman at Forbes, who appears to have quickly respun this fairly devastating academic take-down as simply a sign that “academic economics, like many social sciences, is grounded in hubris and pseudo-precision.”
Perhaps so. But but I don’t think this requires throwing the baby out with the bathwater. Indeed, we needn’t draw any conclusion from this episode other than the narrow one it stands for: there’s nothing automatically devastating about the 90% GDP-to-debt ratio. It would be a mistake to conclude that this justifies terminal apathy about the size of the public debt, just the same as it would be to conclude that discrediting the Reinhart-Rogoff study leaves austerity policies with no other legs to stand on. Nonetheless, it seems proponents of the latter will have to rely on other metrics going forward, as the methodology of the Reinhart-Rogoff study appears to be terminally flawed.