Nonsense in the Reinhart-Rogoff Rescue Effort

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Monday, 27 May 2013 10:41

The mainstream of the economics profession continue to try to rescue Carmen Reinhart and Ken Rogoff (R&R) from the consequences of their famous Excel spreadsheet error. The latest is Michael Heller, who has pronounced Paul Krugman the loser in his exchanges with R&R because he conceded that countries with debt-to-GDP ratios that exceed 90 percent of GDP have slower growth.

This is the sort of piece that should really have the general public thinking about defunding economics programs everywhere. The fact that countries with higher debt-to-GDP ratios have slower growth than countries with lower debt-to-GDP ratios was never at issue. The corrected spreadsheet shows this to be true across the board at every debt level. There is no importance to 90 percent.

The 90 percent cliff came about because of the Excel spreadsheet error, it does not otherwise exist in the data. Heller's claim that R&R never said anything about a 90 percent cliff is an effort to re-write history. This number was embedded in the Bowles-Simpson report that came to be the guidepost for debate on the deficit in Washington policy circles. It also has been used by top officials in the European Union and elsewhere as a basis for austerity.

Using the corrected data the closest thing resembling a cliff can be found in the range of debt-to-GDP ratios of 20 percent of GDP. There would be no reason that 90 percent would ever appear in a discussion of debt in the corrected R&R debt-to-GDP data.

Also, as Krugman and others have repeatedly pointed out, the correlations in R&R tell us nothing about causation. There are lots of sick people at hospitals. Would we not have sick people if we shut our hospitals?

The efforts to examine causation have found the direction is overwhelmingly from slow growth to debt, not the other way around. And of course there is the issue that debt is only half of a balance sheet. If there really was a sharp growth penalty due to crossing some debt-to-GDP barrier then the logical policy response would be to sell some asset(s) to get back below the magic bar. That would surely beat a decade of high unemployment due to austerity. Unfortunately, balance sheets are apparently too difficult a concept for most economists.

Anyhow, if Heller can read Krugman's latest column and declare R&R the winner, he must also believe that George Foreman defeated Muhammed Ali back in Rumble in the Jungle back in 1975. Such is the state of the economics profession.