Were Reinhart and Rogoff wrong about the debt-growth connection?
Economists Carmen Reinhart and Kenneth Rogoff’s research on the relationship between debt and GDP growth, which found that countries with public debt over 90 percent of GDP had on average 1 percent lower growth has been widely cited by economists as well as politicians and was expanded into their bestselling and influential book, This Time ...
Economists Carmen Reinhart and Kenneth Rogoff's research on the relationship between debt and GDP growth, which found that countries with public debt over 90 percent of GDP had on average 1 percent lower growth has been widely cited by economists as well as politicians and was expanded into their bestselling and influential book, This Time is Different.
Economists Carmen Reinhart and Kenneth Rogoff’s research on the relationship between debt and GDP growth, which found that countries with public debt over 90 percent of GDP had on average 1 percent lower growth has been widely cited by economists as well as politicians and was expanded into their bestselling and influential book, This Time is Different.
But new research has attempted to replicate their results and found what could be some fairly embarrassing errors. The Roosevelt Institute’s Mike Konczal summarizes:
They 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. Let’s investigate further:
The Excel coding error is getting most of the attention, but as Konczal points out, the fact that several countries with high levels of debt and high growth rates — namely Australia, New Zealand, and Canada, in the half decade after World War II — were excluded from the sample, seems like the bigger deal. So what happens when you run the numbers with all the errors corrected?
So what do Herndon-Ash-Pollin conclude? They find "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 [Reinhart-Rogoff claim]." [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.
That’s a big difference, given how much attention the original finding received. It will be interesting to see how Rogoff and Reinhart respond.
Update: A first response is up over at Robin Harding’s FT blog. Reinhart and Rogoff write that "It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small" and maintain that "the weight of the evidence to date –including this latest comment — seems entirely consistent with our original interpretation of the data in our 2010 AER paper.”
As Harding puts it on Twitter, "In essence, R&R not yet addressing specific criticisms, but argue that their broader points still stand."
Joshua Keating was an associate editor at Foreign Policy. Twitter: @joshuakeating
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