Reinhart Rogoff redux

Carmen Reinhart and Ken Rogoff have posted a more detailed response to new research purporting to debunk their widely cited findings on the relationship between debt levels and growth. The authors concede that an Excel coding error slipped into their research, and attribute the omission of certain datapoints to the availability of data at the time they wrote their original paper, but maintain that their overall point stands:

So do where does this leave matters on debt and growth? Do Herndon et al. get dramatically different results on the relatively short post war sample they focus on? Not really. They, too, find lower growth associated with periods when debt is over 90 per cent. Put differently, growth at high debt levels is a little more than half of the growth rate at the lowest levels of debt. They ignore the fact that these results are close to what we get in our Table 1 of our AER paper they critique, and not far from the median results in Figure 2 despite its coding error. And they are not very different from what we report in our 2012 Journal of Economic Perspectives paper with Vincent Reinhart—where the average is 2.4 per cent for high debt versus 3.5 per cent for below 90 per cent . The table below makes the similarity of all these comparisons clear:

There is also the question of whether these growth effects can be economically large. Here it is very misleading to think of 1 oer cent growth differences without recognizing that the typical high debt episode lasts well over a decade (23 years on average in the full sample.)

It is utterly misleading to speak of a 1 per cent growth differential that lasts 10-25 years as small. If a country grows at 1 per cent below trend for 23 years, output will be roughly 25 per cent below trend at the end of the period, with massive cumulative effects.

As Slate‘s Matthew Yglesias points out, this is a somewhat weaker claim than their original research, which argued that not only were higher debt levels correlated with slower growth — the causation could just as easily run the other way —  but that the 90 percent level was a significant cutoff.

Paul Ryan’s 2012 budget proposal, for instance, states that " University of Maryland economist Carmen Reinhart testified before the House Budget Committee that 90 percent is often a trigger point for economic decline." That "trigger point" claim is a lot harder to support when the mean growth rate for countries with debt over 90 percent of GDP is 2.2 percent rather than -0.1 percent.

Robert Pollin and Michael Ash, who authored the critical study, also have their own piece in the FT today on the implications of their research for the austerity debate:

The case for austerity has never relied entirely on Prof Reinhart and Prof Rogoff. But the other major claims made recently by austerity hawks have also not held up well. Focusing on the US case, austerity supporters circa 2009-10 consistently argued (frequently in this newspaper) that the large US deficits would lead to dangerously high inflation and interest rates. Neither of these predictions came true. In fact, both inflation and the interest rates on US Treasuries were at historic lows in the four years, 2009-12, during which government deficits were at their peak.[…]

We are not suggesting that governments should be free to borrow and spend profligately. But government deficit spending, pursued judiciously, remains the single most effective tool we have to fight against mass unemployment caused by severe recessions. Recent research by Prof Reinhart and Prof Rogoff, along with all related arguments by austerity proponents, does nothing to contradict this fundamental point.