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Home Publications Blogs Beat the Press How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?

How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?

Tuesday, 16 April 2013 09:49

That's the question millions will be asking when they see the new paper by my friends at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.

There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting. 

But HAP tells us that we need not concern ourselves with any arguments this complicated. The basic R&R story was simply the result of them getting their own numbers wrong.

After being unable to reproduce R&R's results with publicly available data, HAP were able to get the spreadsheets that R&R had used for their calculations. It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90 percent debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6 percent, compared to the -7.6 percent that R&R had entered in their calculation. 

Since R&R country weight their data (each country's growth rate has the same weight), and there are only seven countries that cross into the high debt region, correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, however the missing New Zealand years are the biggest part of the story.)

This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.

In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff. But it was the initial R&R papers that created the framework for most of the subsequent policy debate. And HAP has shown that the key finding that debt slows growth was driven overwhelmingly by the exclusion of 4 years of data from New Zealand.

If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere. It should also cause reporters to be a bit slower to accept such sweeping claims at face value.

(Those interested in playing with the data itself can find it at the website for the Political Economic Research Institute.)



Comments (30)Add Comment
What Will David Brooks Say Now?, Low-rated comment [Show]
The economic truth, Low-rated comment [Show]
Get serious, Low-rated comment [Show]
About that follow-up paper...
written by John Glover, April 16, 2013 12:41
I'm curious whether the April 2012 Reinhart, Reinhart & Rogoff paper you link to is based upon the same faulty spreadsheets.....
No, YOU get serious
written by David Snyder, April 16, 2013 12:43
JP, you should also flunk a college freshman for writing, without backup, such statements as: "At best you are being disingenuous, at worst you are trying to manipulate the masses into more debt creating a larger gap between the wealthy and the poor while eliminating the middle class at the same time. "

JP attempts proof of his argument by intimidation, which may work with his/her college freshmen, but not with serious people who understand arithmetic, dynamical systems, and macro-economics. But what is really telling is that what he ascribes to Dr. Baker is what he knows most deeply about himself.
JP, a lazy person
written by David Snyder, April 16, 2013 12:49
I can name one politician who was influenced by R&R: David Osborne. See http://www.ft.com/intl/cms/s/2...z2QeLEd5Ps.

So, yep, JP is an idiot who can't even bother to read the news or google for easy to access facts. For that, I would definitely flunk a college freshmen.
written by Donald Pretari, April 16, 2013 12:59
"Countries can sell off Assets"...That's why I don'
t get the notion of the US going Bankrupt. Surely the Assets of the US Govt and US Citizens exceeds the National Debt.Or am I wrong?
Wait ...
written by Steve, April 16, 2013 1:06
If four data points were enough to complete change the results of this paper, shouldn't the conclusion all along have been, "the data is not robust enough to support any conclusion at all?"

This seems like a bigger mistake than the arithmetic error. Failing to test your model for robustness gets you in trouble in _high school_ stats.
written by Patrick H, April 16, 2013 1:18
Aside from everything else - if four years of data from New Zealand can radically change the answers, isn't there something wrong with the questions?
written by JP, April 16, 2013 1:19
I wish Dean's comment completion software form would screen for potential posts by commenters using identical log ins as others have previously used. While I have no problem being described as an idiot at times, and accept it all too often, I do disclaim any association with the other JP's comments above.
written by skeptonomist, April 16, 2013 1:20
The NBER lists February to October 1945 as a recession in the US, but unemployment was 2.4% at the end of that time (1.7% at the start). The big drop in GDP was a result of cessation of war production. There was a more legitimate recession in 1949 but as Dean says this was more post-war adjustment and thereafter for many years the economy did well and debt/GDP declined rapidly. To suppose that these recessions were a result of the debt is just asinine.

Britain's debt reached over 250% of GDP at the end of the Napoleonic wars


and this was the beginning of a century of world economic dominance for Britain. In view of this, how could anyone suppose that high debt is crippling? Britain was on a silver or gold standard until WW I, and the BofE did not attempt to inflate away the debt; it was rendered insignificant by economic growth. Debt is not a problem as long as it is held domestically and the economy is basically sound.
Another politician influence by R&R ...
written by David Snyder, April 16, 2013 1:21
Paul Ryan http://www.nextnewdeal.net/ror...s-problems.

And, yes, unethical behavior on the part of R&R matters (cf. http://www.cepr.net/index.php/...tters-also. But what do you expect from the residents of bizzaro-world, where water falls upward, the earth is the center of the Universe, and 99% are taxed to subsidize the leadership-less 1%?
What Does That Mean to Us?
written by James, April 16, 2013 2:18
Reading economists who lecture the world based on simple erros = LOL

Watching politicians who lecture the world based on others' FAULTY work (without even reading or thinking independently) = Priceless aka LMAO
Hear what they want to hear
written by bakho, April 16, 2013 2:58
Our governing elites hear what the malefactors of great wealth want them to hear. If not Reinhart and Rogoff, then they would have found some other useful tool.

This is all about class warfare, the wealthy taking from the rest of us and using every bit of deception to fool most of the people most of the time.
Skating very close to academic fraud
written by BruceJ, April 16, 2013 3:01
Aside from the Excel error, which should getb the paper retracted immediately on procedural grounds, the kinds of picking and choosing of their data reeks of unethical practice. Fraud by cherry picking data is as damaging as outright fraud.
It is total debt which counts, Low-rated comment [Show]
written by Charles Barrick, April 16, 2013 6:56
Reminds me of the first rule of Marketing: You can fool some of the people all the time and you can fool all of the people some of the time ---- and that's good enough!
in a sane world
written by Blue Meme, April 16, 2013 7:36
...Reinhart and Rogoff would live out their days in academic exile, shunned by polite society, sharing regrets with Michelle Rhee and other conservative data-fudgers.

Sadly ours is not a sane world. And so R&R can say things like "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". Why stop being dishonest about your work now, eh?
Is there a pattern
written by Monado, April 16, 2013 9:20
Do the other errors and omissions in the spreadsheet also push the error in the same direction?
written by liberal, April 17, 2013 7:37
John Barrett wrote,
Now, the higher taxes are, the slower the growth and prosperity of the nation involved...

That's flat false.

First, if taxes are zero, the growth rate will be enormously negative, as the nation descends into a Hobbesian war of all against all.

Second, taxes can have negative effects on growth, but it depends on what's being taxed. Taxing economic rents will have no negative effect on growth whatsoever. In particular, land rents (which amount to 10--20% of GDP) could be taxed at much higher rates than they are currently, with no negative effects...or indeed possibly a positive effect, as land currently held for non-productive purposes (think parking lots in urban areas with high site values) would be forced into productive use.
written by liberal, April 17, 2013 7:43
Donald Pretari wrote,
That's why I don't get the notion of the US going Bankrupt.

A nation with a fiat currency and debt priced in that currency cannot go bankrupt. It can, of course, suffer from hyperinflation.

The notion that we're anywhere close to such a situation is LOL funny.
Seeking Redress
written by Karen, April 17, 2013 10:15
When an engineer designs a bridge badly and it collapses, he loses his license.... his ability to make a living from his trade.

When an architect's work causes death or human suffering due to his negligence, the same thing happens.

When do these two lose their livelihood?
while we're being honest...
written by ELD, April 17, 2013 10:23
It might be nice to acknowledge that women did not just "opt" to leave the paid workforce: they were pressured in all kinds of ways to leave it, and to leave the higher-skilled, better-paying jobs they held during the war, so as to allow returning GIs to have the jobs. Just sayin'...
written by AlanInAz, April 17, 2013 10:38
Has anyone plotted unemployment against growth and concluded that high unemployment is a drag on growth?
written by liberal, April 17, 2013 11:52
Karen wrote,
When do these two lose their livelihood?

Bad analogy. Their job isn't to promote science that benefits the common welfare, but rather to create agitprop for The Masters. As a real economist once put it, "All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind."
impact of replication will hopefully be recognized more
written by Political Science Replication, April 17, 2013 12:07

Policy makers might not change their view of austerity measures after this, but they will have to cite another paper as justification and answer criticism more carefully.

Among researchers and journals the value and possible impact of replication will hopefully be recognized more than before. Let’s not forget, a recent study found that out of 120 political science journals only 18 had a data sharing/replication policy… (http://wp.me/p315fp-aC).

Without replication, economics, political science and policy makers might base their decisions and work on wrong results – even if it’s just because of an excel error.

written by liberal, April 17, 2013 12:13
Political Science Replication,

Sadly, lack of replication bedevils biomedical research, too.
another idea on solving the crisis
written by G. Oikonomidis, April 17, 2013 3:12
You can find the proposal published at the "American-Hellenic Chamber of Commerce" Business Partners magazine: http://bponline.amcham.gr/?p=2099 , while in the there-mentioned blog of mine you can also find the rest of the material on the idea.

I hope that the idea is worth giving a chance of being noticed and considered.
written by Andrew Martin, April 17, 2013 7:43
I doubt that politicians like Osborne and Ryan are "influenced" to pursue austerity by R and R's work. It's pretty clear they use R and R as a rationalization for pursuing the austerity they want to pursue so as to roll back the welfare state or, in Ryan's case, "starve the beast." Especially in Ryan's case the hypocrisy about cutting the deficit and debt is made obvious by his support for tax cuts designed to make the very rich even richer even if they add to the deficits. I wonder to what extent R and R's work is itself driven by ideological preferences. Why else use statistical techniques that don't distinguish between the highly different times and places in which debt levels result from quite different factors, such as postwar demobilization, after which robust growth disposed of debt?
written by Rich Man, April 26, 2013 11:15
Reinhart and Roghoff were not the only researchers with the results.

In Government Size and Growth: A Survey and Interpretation of the Evidence, Swedish economists Andreas Bergh and Magnus Henrekson find a “significant negative correlation” between size of government and economic growth.

In The Impact of High and Growing Government Debt on Economic Growth, An Empirical Investigation for The Euro Area, Cristina Checherita and Philipp Rother (ECB) find that a government debt to GDP ratio above the turning
point of 90-100% has a “deleterious” impact on long-term growth.

In The Real Effects of Debt,
Stephen G. Cecchetti, M.S. Mohanty and Fabrizio Zampolli (BIS) determine “beyond a certain level, debt is bad for growth.

Politicians misuse data, gee, I can't believe that!
Dr. Baker is just another political schil with an agenda also.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.