CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Yet More Fun With Reinhart and Rogoff

Yet More Fun With Reinhart and Rogoff

Sunday, 21 April 2013 15:10

In Carmen Reinhart and Ken Rogoff's (R&R) famous and now largely discredited "Growth in a Time of Debt," New Zealand's -7.6 percent growth (wrongly transcribed as -7.9 percent) in 1951 played an outsized role in their conclusion that high debt led to sharply lower growth. This number carried inordinate weight because R&R had mistakenly left out 4 high debt years for New Zealand in which it had seen healthy growth. Using their country-weighted methodology (each country counts the same, regardless of size or years with high debt) this mistake by itself subtracted 1.5 percentage points from the growth rate of countries in years of high debt.

To make the story better, today I received a tweet that informed me that the -7.6 percent growth New Zealand experienced in 1951 was not in any obvious way attributable to its high debt. In fact, the country suffered from a labor dispute that led to a strike/lockout of waterfront workers that lasted 5 months. Perhaps this dispute can be linked to New Zealand's high debt at the time, but the connection is far from obvious. This is the sort of problem you get when using very small samples. 

Comments (7)Add Comment
Outlier Outs Liars
written by Sandwichman, April 21, 2013 4:17
And then there are those poor, poor, pitiful Danes, plagued by high wages and long vacations...
written by JDM, April 21, 2013 6:59
Even worse, they're living longer. Oh, the humanity!
written by weird professor, April 21, 2013 9:03

But 1951 was a very strange year for the Kiwis, and the falling GDP then is not an example of weak growth with high debt. The price of wool tripled in 1949-50, and since it made up about half of the country’s exports this boosted GDP enormously. When prices fell back, GDP fell again. Government debt really wasn’t an issue.

As Brian Easton, a New Zealand economist and former government adviser, pointed out to me, there is no official data for NZ GDP in volume terms before 1955.

His own GDP series – there is no official data – suggests GDP fell 5.5% in the 1951-52 fiscal year, after rising 15.5% the year before.
Failure of Research Methods
written by LSTB, April 22, 2013 6:46
The thing about debt-to-GDP is that ... it's just a ratio. That's it. It helps compare two countries with different-sized economies and debts, and it does the same thing with one country over time. Sure, it's a step up from simply throwing around nominal numbers, but it says nothing substantive about public debt.

Thus, the Reinhart/Rogoff embarrassment isn't so much a failure of economics research or techniques, it's a failure of basic research methods—a failure of curiosity. You can't ask "What happens to growth at high debt-to-GDP ratios?" without having a clear answer to "What happens at high public debt levels ceteris paribus?"

Reinhart/Rogoff didn't do that, or they thought they already had the answer. If they had, they would've been forced to say that there are too many ceteri to be able to move on to the debt-to-GDP question.
written by Gary, April 22, 2013 8:00
Wonderful. Our fiscal policy rests on what happened in one year more than half a century ago in New Zealand.
written by Samuel Conner, April 22, 2013 1:50
There are simple resampling tests that can be used to assess the sensitivity of a conclusion to the details of the data sampling. It sounds like no effort was made to assess this, and if that's right, I think that the editors of the journal in which the paper appeared may share some of the blame.
The New Zealand Wool Boom
written by Mark A. Sadowski, April 22, 2013 2:30
Although the 1951 Dockyard Dispute makes for tragic reading, it had little if any real impact economically. It was more a lockout than a strike with the authoritarian right wing government using the Cold War as an excuse to sieze the dockyards, draft 3000 troops and hiring scabs, to keep the cargo moving and thereby crush the union. Export tonnage declined by only 2.9% in 1951 or barely a blip.

The obvious candidate for why there was a recession in 1951 is the New Zealand Wool Boom:

"In 1950, as a result of the Korean War, the United States sought to buy large quantities of wool to complete its strategic stockpiles. This led to the greatest wool boom in New Zealand's history, with prices tripling overnight.[1] In 1951 New Zealand experienced economic growth such as has never been seen again since.[2] The echoes of the boom reverberated into the late 1950s, by which time a record number of farms were in operation.[3]"


A good paper that discuses the economic impact of the New Zealand Wool Boom is here:


Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

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.