Economist fight! (original link)
Reinhart and Rogoff start firestorm.
by Samson Okalow
Apr 19, 2013
Greek ‘Indignants’ protest in front of the Greek parliament, June 19, 2011 in Athens (Photo: Louisa Gouliamaki/Getty)
Finally! Some action in the normally staid world of economists! The revelation earlier this week that a seminal study by economists Carmen Reinhart and Kenneth Rogoff is deeply flawed has set off a growing firestorm of debate.
The quick and dirty (emphasis on, erm, dirty): respected economists Reinhart and Rogoff in 2009 released a paper called “Growth in a Time of Debt” which concluded that countries with debt-to-GDP ratios greater than 90% experienced dramatically lower growth. The study became the basis for the influential 2010 book, This Time Is Different: Eight Centuries of Financial Folly, adopted by so-called “austerians” as a bible of sorts for preaching debt and deficit cutting.
Well, it just got debunked by several economists from the University of Massachusetts in their paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” Economists too numerous to count—from Krugman to Yglesias—have been weighing in all week. At this point it’s just piling on. But it’s deserved.
The spreadsheet errors and data omissions are so glaring that the fixes return results starkly different from those which went on to form the intellectual underpinning for the austerity sweeping Europe and, to a lesser extent, other parts of the world. It won’t be long now before the debate shifts from one of sheer surprise to more darker tones of whether or not there was some particular intent behind the errors.
While most media chatter has so far concerned itself with the spectacle of a pig fight, what will be more long lasting is the impact, if any, these revelations will have on the pursuit of austerity policies. After all, the results have so far been disastrous: Southern Europe has cratered. France is moribund. The UK economy actually shrank in Q4 2012, according to the Bank of England. Even the fabled Nordic countries are starting to face headwinds as they strive to reach the EU-mandated deficit targets of 3%.
L. Randall Wray, professor of economics at the University of Missouri-Kansas City, was actually among the first to claim RR’s work was wrong. Way back in 2010, seven months after the RR book was published, he co-authored “Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff.” Why did his report fall on deaf ears?
He said via e-mail: “First there was the will to believe. Everyone wanted to believe that government debt is bad. Reinhart and Rogoff seemed to have generated evidence—no matter how shoddy their research was—that supported what they wanted to believe. Second, since they had refused to provide the data, no one could check. Hence our main argument—that the method was flawed because they had no distinction between sovereign debt and non-sovereign debt—did not resonate.”
Is this a turning point?
Although I’m less optimistic, Wray thinks it is. Advising RR to “get out of their university offices now and then and confront the real world,” he wrote: “They will not be able to overcome the fact that they fudged the data. I hope people will now rethink the silly approach.”
Of course, not everyone has been moved by the revelations. Fresh stories of deprivation and despair in austerity-saddled Greece fail to sway Jason Clemens, VP of the Fraser Institute. He makes the somewhat curious argument that “if there are people saying kids are going hungry I would put forward the suggestion it is more likely to do with the unemployment rate and their inability to improve economic growth than it has to do with government spending cuts.”
Finn Poschmann, VP research at the C.D. Howe Institute, is a little less iron-fisted, but ultimately backs the sentiment behind RR’s findings while acknowledging the specifics are wrong. “For people who are pro austerity they will have to be very careful in how they frame the argument in making great claims about a particular level that causes some sort of tipping point,” he says. “For those who think that having governments that should try to have low debt as opposed to high debt, it makes no difference—they’ll still be right. Low debt countries tend to perform better over time than countries that carry higher debt to GDP ratios, according to both the Reinhart-Rogoff data and the corrected data from the [University of Massachusetts] authors.”
The austerians have lots of fight left in them yet. Bring popcorn.
