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Home Publications Blogs Beat the Press Robert Samuelson Tries to Salvage Reinhart-Rogoff and Austerity

Robert Samuelson Tries to Salvage Reinhart-Rogoff and Austerity

Thursday, 25 April 2013 07:15

I have a policy of not discussing items that directly refer to me in this blog, but I will make an exception today because the issues raised by Robert Samuelson are important. In his column Samuelson makes two key arguments. First, that the Reinhart-Rogoff conclusions about high debt leading to slow growth still stand even after the errors in the original paper were corrected, and second, that this work was never really the basis for austerity anyhow.

Taking these in order, Samuelson constructs a chart showing the originally reported and corrected relationships between debt levels and GDP growth.

Debt/GDP Annual economic growth, 1945-2009

UMass economists
0-30% 4.1% 4.2%

30-60 2.8 3.1

60-90 2.8 3.2

90+ -0.1 2.2

He then tells readers:

"After recalculating the Reinhart/Rogoff data, the UMass economists confirm that high debt implies lower economic growth."

No, that is not right. The recalculated numbers show that high debt levels in the countries examined by Reinhart and Rogoff were associated with lower growth. However as the paper by Thomas Herndon, Michael Ash and Robert Pollin that exposed the error clearly explained, the growth falloff for countries with debt-to-GDP ratios above 90 percent was not statistically significant. In fact, they found a much stronger negative relationship between debt and GDP growth at very low ratios of debt-to-GDP. This means that if someone was basing policy on the corrected Reinhart-Rogoff numbers they would be arguing for debt-to-GDP levels in the range of 15-20 percent. That is not what Reinhart and Rogoff or anyone what else in this debate is saying. 

More importantly, there was always the issue of causality, which is ignored by Samuelson. It is just as likely that weak growth leads to high debt as high debt leads to weak growth. If the former is true, getting upset about high debt levels would be like saying that hospitals cause people to be sick. UMass economist Arindrajit Dube did a nice test of causation and found the causality from growth to debt is very strong, while finding no real evidence of causation in the opposite direction.

This is hardly surprising. Debt is an arbitrary category. Countries also have assets (e.g. land, mineral rights, fishing rights, broadcast frequencies etc.). If the debt side of the balance sheet could lead to a sharp slowdown in growth, then they would be foolish not to sell off some of these assets. This would lower the debt-to-GDP ratio and produce a huge growth dividend, if anyone believed the Reinhart-Rogoff story. 

Of course no one advocated selling off large amounts of assets, which brings us to Samuelson's second point, that Reinhart-Rogoff paper was never really the basis for policy. His argument was that political figures wanted to pursue austerity anyhow and just grabbed Reinhart-Rogoff as a fig leaf.

Samuelson will get little argument from me on that point. Why would political leaders want to pursue austerity? Well, let's look at the impact of the policy. High unemployment has weakened workers' bargaining power, allowing employers to get the vast majority of the gains from productivity growth over the last 5 years. While the rise in profit shares may not always offset the loss in profits due to weaker growth, this is likely true today in many countries, including the United States.

From this vantage point, austerity is just great for those on top. The pressure for austerity also opens the door for lowering tax rates on the wealthy in the future, for example by cutting back programs like Medicare and Social Security in the United States, and their equivalents overseas. If these sorts of social commitments can be reduced, then the wealthy can look forward to being able to keep more of their income 10-20 years in the future. And if we think there is nothing that the government can do about unemployment because of the demands of the austerity gods, then we can blame workers' problems on their lack of skills and inability to deal with the technological advances of a global economy.

In short, austerity serves some very useful purposes for the rich and powerful. It would hardly be surprising to me that the political figures they support are more likely pursuing austerity to please them than because of anything that Reinhart and Rogoff wrote. On the other hand, it is extremely useful to have ostensibly reputable studies like Reinhart and Rogoff that can be used to make the case that austerity serves the general good and not just the rich.

However corrupt politics in the United States might be, it just doesn't look good for the President of the United States to go on national TV and say that, "I am cutting back spending on Social Security and other important programs to keep the unemployment rate high so that my rich campiagn contributors will get even richer." It is far more respectable if he can hold up a paper by two professors from Harvard and tell the American people that we have no choice but to cut back spending or the economy will go down the toilet. 

The research from the UMass crew has taken away the fig leaf. The question is whether the austerity gang will be able to continue to press their case for upward redistribution even in the full light of day.

Comments (10)Add Comment
Simply a hack
written by bakho, April 25, 2013 9:05
"There is no obvious exit from this dilemma except a burst of spontaneous growth, which is conspicuous by its absence." - Samuelson

This is what some politicians hope will happen. Except history tells us otherwise. Why do states, including those run by the most conservative GOP governors have programs to entice private business to locate to their state? Offer infrastructure, workforce training dollars and other incentives? Do they do these things because they truly believe that BigG has no role in growth and are simply creating a show? Or do they truly believe that BigG can make investments that will bring jobs to their area? Look at what they do and not what they say. What they do tells us that government investment works and is a necessary component of job growth. Samuelson, like the paid shills for BigTobacco, is setting smokescreens for his wealthy elite overlords.

Growth is not spontaneous. Growth happens because of a number of factors including government planning and investment. Samuelson is a cheerleader for the 1 percent and a foot soldier in the class warfare against the 99 percent.
austerity is not good for the rich...bass ackwards..., Low-rated comment [Show]
written by fuller schmidt, April 25, 2013 9:50
Don't forget infrastructure, Pete. Government spending on infrastructure is always negative for an economy.
Global policy for the powerful (wealthy)
written by nassim Sabba, April 25, 2013 9:50
Confronted with the notion that the powerful are trying to lower the expectations of a descent life-style in the west in order to avoid the need for wars and reduce global inequity.
My reaction was that, first, the powerful are global and would not care. But, even if they did, this is the wrong way to alleviate global inequality. It will not take much to improve the lot of 40 to 50% of the world's poor to a descent level. If their lives improve, then the markets expand for everyone, including the US businesses.
Thus, if in the remote chance that the austerity propaganda is really to bring down western material well being to reduce international tension, it is wrong-headed and fatalistic.
We all live on the same ocean. You can't drain it to make everyone be at the same, low, level. But if you give boats to everyone, they will eventually be equal on a dignified level.
The powerful don't need drastic measures to protect themselves, they have to make the need to protect themselves go away with better global economy. That would be less costly than the austerity game.
Many foot soldier, such as commentator and talking heads would have little work they are used to, but we can "re-train" them for a new world.
Jane you ignorant sl@#
written by Peter K., April 25, 2013 9:52
Pete, you are sullying a perfectly good name. Please stop.

"Captive agencies funnel tax dollars to their captors." A bit of a non sequitur.

"Transfers are not expansionary, and thus cutting them is not contractionary. Now, when defense spending fell in the 90s, we had a bit of a boom. Hmmm austerity (properly measured) leads to growth?"

Again you conservatives are really, really bad about causality. The boom in the 90s was thanks to Greenspan and low interest rates. Also Clinton raised taxes.

"If government is really inefficient, this could easily be true. (Million dollar toilet seats in air force jets anyone?)"

Billion dollar bailouts of the banks? Subsidies of the inefficient financial sector? Two can play that game. Government rescued the private sector which had inefficently managed risk and blew a housing bubble / had a panic. Perhaps next time we'll let it fail and start over.
Where do I start?
written by Matt McOsker, April 25, 2013 4:13
First, the RR paper compares apples to oranges. A country with a low debt/GDP running a current account surplus could do just fine.

Two, you cannot compare sovereign currency countries (e.g. Japan and U.S) with non-soveriegn currency countries such as Greece. These should have been segmented out.

Three, look at the U.S. historical experience reductions in debt led to every depression and many recessions:

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.

1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.

1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.

1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.

1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.

1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001

2004-2007: U. S. Deficit Reduced 61% (from $413B to $160B) Great Recession began 2008

Now look at Europe, the inability/reluctance to issue more debt, means bigger debt, high unemployment, and slower growth.

I used to be an Austerian, but I got a clue.
The Next Failed Theory to be Exposed as a Fraud ...
written by The OutSourced One, April 26, 2013 8:39
So now that we all agree that debt levels of over 90% don't cause GDP to magically shrink can we now also admit that there is some level of immigration that drives down wages, and the US probably exceeded that level years, or even decades, ago.

Any proposed law that has the support of Paul Ryan may not be the best one for the American worker.


I watched a Senate hearing on CSPAN the other day and I thought it was a re-play of a 1999 hearing run by mistake. One witness after another spoke of worker shortages.

There were proposed visas for shortages of low-skilled, middle-skilled, high-skilled and agricultural workers.

The need for the new W visa was particularly perplexing, until I realized what it stood for - Walmart Worker.
33 is 25
written by CMike, April 26, 2013 12:51
People in policy debates would rightly view the prospect of annual growth slowing by 2.9 percentage points as being a very serious matter. That would imply a country with a debt rising above the 90 percent threshold would have an economy that is one-third smaller after a decade as a result of its high debt level.

A GDP with 2.9 percent growth compounded for a decade gets you to a GDP that is 33% larger than the one you started with but with no growth you're left at the original GDP level which is one-quarter smaller than that. (I think.)
written by robertf, May 04, 2013 8:15
“The interest rate on the national debt is low due to QE by the FED. But just how has the FED articulated the method it will use to reabsorb all the new money held at the FED for money center banks should economic activity ever pick up? That cash is being held at the FED for the money center banks by their having done the FED's bidding by buying T-Bills for the FED and in turn selling these to the FED for all the cash credited to their accounts at the FED. If the FED would have to sell the T-Bills to reduce the tremendous increase in the supply of money over the past few years to reign in or control inflationary pressures, wouldn't it likely cause an increase in the T-Bill rates? And wouldn't that increase the annual interest on the national debt? And if the national debt were half again as large as it is today when the economy finally recovers, wouldn't federal spending on interest be so large relative to historical levels that the magnitude of interest on the debt would perpetuate the need for still more QE? Are we Alice in Wonderland?
written by robertf, May 04, 2013 8:41
I quote from another source: US News, March 13, 2013

--- Speaking at an economic summit on Wednesday, the former Federal Reserve Chairman advised caution about current accommodative central bank policy, which involves near-zero interest rates and large-scale asset purchases in an attempt to stimulate growth. Volcker called the notion that the Fed can nimbly shut off that accommodative policy in response to inflation upticks "hubris."

"There is no central bank that I know of that has ever exhibited the capacity for that kind of fine tuning," he told an audience at the Atlantic Economic Summit in Washington, D.C.

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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.