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Home Publications Blogs Beat the Press Quick Thoughts on Reinhart and Rogoff's Response

Quick Thoughts on Reinhart and Rogoff's Response

Tuesday, 16 April 2013 16:51

Carmen Reinhart and Ken Rogoff (R&R) responded to the paper I noted earlier by Thomas Herndon, Michael Ash, and Robert Pollin (HAP), which showed that their famous result associating high debt levels with slow growth was driven by spreadsheet errors. The gist of the response is that HAP also find that high debt is associated with slower growth, and that other studies (including one of theirs) found the same result anyhow.

The first point is highly misleading. It is true that in most of their specifications HAP found growth was slower in periods with debt levels above 90 percent of GDP than below, but the gap was relatively small and nowhere close to statistically significant. Furthermore, they found a much bigger gap in growth rates around debt-to-GDP ratios of 30 percent. If we think that R&Rs methodology is telling us something important about the world then the take-away should be that we want to keep debt-to-GDP ratios below 30 percent.

If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.


As far as turning to other work, these papers should be examined. Publishing papers complaining about government debt loads is clearly a growth industry in an otherwise weak economy. But these papers have absolutely zero relevance to the HAP's critique of R&R's original paper, which has in fact played an enormous role in policy debates. HAP can hardly be criticized for focusing on the leading paper in this framework and not addressing the derivative versions.

Btw, since I had questions in comments and e-mails, I will briefly repeat one of my main points on this debate. The federal government owns literally tens of trillions of dollars of assets. The most obvious form of these assets is land, but it can also sell off fishing rights, use of the airwaves, and even patent and copyright monopolies. If we actually believe that high debt ratios impose some severe burden on future growth then nothing stops the federal government from selling off $5 trillion in assets and reducing its debt-to-GDP ratio by 30 percentage points.

Note there is no entry in a debt-to-GDP ratio for assets, just liabilities. So if we believe the R&R story, then we can increase the growth rate through this sort of asset sale.

Just to be clear, I think this is absurd. If we are doomed to slow growth because we have a debt-to-GDP ratio of 100 percent of GDP, it can't make any sense that we free ourselves from this burden by selling huge amounts of coastline or whatever other assets can get us up to $5 trillion. I mention this possibility to point out the silliness of the R&R view, not because I think that a massive asset sale would be good policy.

Comments (19)Add Comment
Bravo Dean
written by jim, April 16, 2013 5:30
"Nevertheless, 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."

"serious" economists
written by ltr, April 16, 2013 6:20
Bravo, Dean.
written by Troy, April 16, 2013 7:01
then nothing stops the federal government from selling off $5 trillion in assets

that will do wonders for our Gini:


The problem is the top 5% are clearing 1/3 the national income, and we are running $500B/yr+ trade deficit that is also eviscerating the "paycheck" aka J6P economy.

We are back-filling these imbalances with our $40,000+ per worker (!) total government expense while only taxing about half what the eurosocialists tax.

Selling off what remains of the commons is not a solution, it's just digging the hole deeper.
written by Bloix, April 16, 2013 7:25
Isn't the key takeaway from the response that they don't deny the errors? It's a scandal that they do not directly say so. It would be one thing to say, "We admit that our original study was flawed in every respect that HAP has found, but we stick by our original conclusions for reasons X Y Z." It would also be appropriate to say, "We just got this and we need to check the calculations." Or, they could say, "We flatly deny that HAP is right and here's why."

But no, they don't do that. They excuse their failure to respond to the accusations by saying "we just got this." And then they go on to make a series of points that obviously required much more work than just checking their math.

This allows their supporters to claim that the jury is out on the truth of HAP's accusations while also claiming that the accusations are irrelevant. It's a PR gambit to minimize the damage for this news cycle while figuring out what to do for the next one. It's not what genuine scholars would do.
If an economic paper is discredited in the forest does anybody hear it?
written by Jennifer, April 16, 2013 7:36
If you were wondering how long it would take for the political world to recognize this error . . . well it's going to be more then a day since apparently Jeff Sessions was quoting the paper today at Jack Lew at a budget hearing today.
The whole thing just emphasizes the cult that the economics profession has become. You would not expect a religious person to lose their faith over "evidence" that their deity did not exist, by the same token the people who where such fans of R and R are not going to lost the faith over some inconvenient thing like facts.
written by TBV, April 16, 2013 8:32
Wouldn't the sale of $5 trillion of assets have a generally depressive impact on asset prices in general, which is the outcome that has been so vehemently suppressed these last 25+ years via the Fed's various monetary policies?

I think it'd be better if the govt just pretended that it could sell its assets, rather than actually go about it. Nobody wants accurate MTM pricing, and certainly not interventionist-minded economists.

ps: You have a very nice website for posting comments.
No surprise ...
written by David, April 16, 2013 9:12
Rogoff continues the campaign of righteous confusion he waged at the IMF.
written by Chris Engel, April 17, 2013 2:01
Just want to echo the appreciation for your work and everyone at CEPR.

You expressed scepticism of the validity of this study from day one and it's days like this where you guys deserve a cold one and pat on the back!
written by Sam Pooley, April 17, 2013 4:47
If the supposed gap isn't statistically significant, there isn't a gap, right?
written by kharris, April 17, 2013 8:53
Sam P.,

For the purposes of marching around claiming you know best, yeah, you need your results to withstand scrutiny. In this case, the claim was based on statistical significance, so the claim is not valid if the result is not statistically significant. Rogoff doesn't get to tell us how to run fiscal policy based on his research if his research is wrong.
written by Julio Huato, April 17, 2013 11:17
The ultimate asset that the federal government has is its power to tax or, if one prefers, the willingness of people to allow the U.S. government to tax them. By "tax" I mean here, in general, people handing the government real resources for nothing other than the promise of some benefit, public good, or no harm (as in accepting "an offer we cannot refuse").

By looking at the TIPS yield, it seems to me like there's a lot of deep-pocketed people, willing market participants, who are begging the U.S. government to please pretty please tax them:


Also, debt can be forgiven or voided by civic-minded creditors concerned about the state of public finances or repudiated by the government under pressure by the citizenry, who view at least a part of it as a sort of criminal booty subject to confiscation. Etc.

Bottom line, the U.S. government has absolutely no technical problem expanding the liability side of its balance sheet, other than the totality of our real productive resources and our willingness to pool these resources together to allocate them according to our politically-sanctioned priorities. So it is really up to the 99%.
written by fuller schmidt, April 17, 2013 1:41
Thanks for making this so easily understood.
written by Perplexed, April 17, 2013 2:07
-"The federal government owns literally tens of trillions of dollars of assets."

Yes, and in addition they can tax tens of trillions of dollars more of assets and income, without having to sell any of the assets they currently own. "We" have over $65 trillion in wealth and $15+ trillion in annual income; all of which can be taxed by the government. Furthermore, the wealth and income are so highly concentrated among so few people (wealth GINI: .87; income GINI: .48) that the entire debt could be paid off without changing the "lifestyle" of anyone in the country. This singular focus on debt/GDP ratios is misguided to begin with; its simply a distraction to achieve political objectives. Lets start showing the ratio of debt/total available assets and income to put this in perspective and expose the underlying political strategy. Then lets get "our representatives" to go on record with who does and doesn't support it. The ruse has gone on way too long and done way too much damage!
so what are the consequences for R&R?
written by Alex Blaze, April 17, 2013 5:44
Seriously, what's the economics profession going to do?

These are two respected full professors at Harvard. Will the school take action like the University of Colorado did against Ward Churchill? Will other researchers cite their work less? Will the journal that published the original article even run a correction?
It's not that big a deal!
written by Benjamin Kupersmit, April 17, 2013 9:30
It's not like R&R screwed up in a football or baseball game, or messed up American Idol. Then, they'd be in big trouble.
the politics of economics
written by Hugh Sansom, April 18, 2013 6:25
My own interest is as much in the politics of economic 'science' as it is in the economics itself. Faced with disconfirming evidence, scientists will make ad hoc modifications to their thesis to preserve the core claims. Fine. This is how science works. Rogoff and Reinhart are doing this in their response.

More interesting will be the policy proposals and the long term responses in economics and political science. My take is that economics and political science today are so fanatically, irrationally wedded to conservative positions that the HAP argument — no matter how well argued or supported by evidence — will effectively be buried.

And there is still another factor: The HAP paper is coming out of the 'notorious' University of Massachusetts at Amherst. Rogoff and Reinhart are at Harvard... Harvard! They must be right. Those UMass people are leftie no-goodniks at a public school. They must be wrong!

A good indicator of irrationality in the sciences is found in unmoving adherence to disconfirmed positions and arguments from authority. Economics and political science are riddled with both.
Quid Pro Quo?
written by bakho, April 18, 2013 7:52
Book deals can be quite lucrative and set the authors financially for life.

Was a deal made with the malefactors of great wealth to promote the book and Big$ for the authors in exchange for the authors promoting the financial interests of the promoters?

I have no knowledge of this. Such arrangements have existed in the past for other authors. Books seldom get to be best sellers on their own merits. Promotion is essential and can allow those who control the promotion to have control over content. Book publishing is one way to funnel money from Big$ special interests to Politicians, pundits and "experts".
Gedanken experiment
written by Kaleidic, April 18, 2013 10:00
OK, so it's not 90%. What about 100%, or if not that 150%, surely there is some amount of debt that overcomes the ability to cover the debt service costs, particularly if the economic growth rate is 1% or 1.5% and not 3%. But you say the Federal Reserve will keep on suppressing interest rates with QEternity, and what is the economic effect of that? Continued impoverishment of savers and malinvestment and at some point surely high inflation.
Re. Gedanken experiment
written by Julio Huato, April 19, 2013 5:44
Kaleidic: "OK, so it's not 90%. What about 100%, or if not that 150%, surely there is some amount of debt that overcomes the ability to cover the debt service costs, particularly if the economic growth rate is 1% or 1.5% and not 3%."

It's not you or me. It's the state you're talking about, the most powerful state in human history. Its ability to service its debt is only limited by the amount of productive resources in the country -- labor, "capital," natural resources, and embedded technology -- which are immense, and the willingness of its citizens to pool these resources fiscally (directly by taxation or indirectly by borrowing) and deploy them to achieve political ends.

What on earth does the fact that promises are sometimes kept and sometimes broken have to do with whether the productive wealth of a society is employed fully or not? So, what are you saying: That society should disintegrate because some of its members made promises under one set of conditions but failed to keep them under a different set of conditions? What good would that do to your "savers"? What are they saving anyway if not contracts, promises made by others?

Forget the tokens: At the end of the day, all we have is one another. Deep down, owning stuff is just a token that makes us feel as if we have some certainty about the future. True insurance is people willing to help you when you need to be helped. All else is illusion that a severe enough crisis should dispel.

Anyway: Aren't markets supposed to be good at discounting default risk? So, let those you call "savers" (I call them "capitalist pigs," "parasites," because they live off 'property income' rather than 'labor income') take their haircut. Let's tax the heck out of them. Let's inflate our way out of the depression. That'll teach them some moral hazard. And even they will wind up thanking us for our Keynesian wisdom.


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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.