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Home Publications Blogs CEPR Blog Reinhart and Rogoff Trip Over Data While Attacking Krugman

Reinhart and Rogoff Trip Over Data While Attacking Krugman

Written by David Rosnick   
Sunday, 26 May 2013 16:19

Yesterday, Carmen Reinhart—she of the infamous Excel error—wrote an open letter to Paul Krugman taking issue with his “spectacularly uncivil behavior.”  That his “characterization of our work is selective and shallow.”  In particular, Reinhart citesKrugman’s views on Italy.  She writes:

However, [falling interest rates in “high-debt Italy”] is meant to re-enforce your strongly held view that high debt is not a problem (even for Italy) and that causality runs exclusively from slow growth to debt.  You do not mention that in this miracle economy, GDP fell by more than 2 percent in 2012 and is expected to fall by a similar amount this year. Elsewhere you have stated that you are sure that Italy's long-term secular growth/debt problems, which date back to the 1990s, are purely a case of slow growth causing high debt.  This claim is highly debatable.

In fact, Reinhart recently cited Italy as an example of a “more recent public debt overhang episode”.  She cites another paper to back up her claim that the evidence shows the direction of causality runs from high debt to slow growth.  But even a cursory examination of the data undermines that case.

Figure 1 takes data from Reinhart’s paper in the Journal of Economic Perspectives and shows very clearly that Italy built up its debt after growth slowed significantly—not the other way around.  In fact, when growth slowed back in 1974, Italy’s debt-to-GDP was only 41.3 percent.  Italy did not reach 90 percent debt-to-GDP until 1988—some 14 years later.


Figure 1: Real GDP Index (Italy Since 1947) (log)


Source: Reinhart, Reinhart, and Rogoff and author’s calculations.

Note: Specified years indicate first year of high-debt episode (see Reinhart, Reinhart, andRogoff)


Indeed, there is a clear association in Italy’s post-war data between high debt and slow growth, but it clearly tells a story very different than what Reinhart would have us believe.

From 1947-74, real economic growth in Italy averaged 5.8 percent per year.  Over the period 1975-88 (when Italy’s debt grew from 41.3 to 90.9 percent of GDP) economic growth averaged only 2.7 percent per year—a fall of 3.2 percentage points.  It is clear, based on Reinhart’s data, that high debt could not have caused this slowdown in Italy’s economic growth, even if Italy’s period of low debt is associated with much faster growth.

Nor is Italy the sole example.  In all four such recent examples of advanced countries with episodes of high debt, the slowdown precedes the increase in debt.

Figure 2: Real GDP Indices Since 1947 (log)


Source: Reinhart, Reinhart, and Rogoff and author’s calculations.

Note: Specified years indicate first year of high-debt episode (see Reinhart, Reinhart, andRogoff)

Though less obvious for Belgium, most of the jump in debt-to-GDP came in 1980 and was largely the result of a series break in the data.  According to the data on Reinhart andRogoff’s website, Belgium’s gross general government debt-to-GDP was 62.5 percent in 1970 and falling (debt-to-GDP stood at 57.8 percent in 1974—the year real GDP peaked).  Nevertheless, from the peak in real GDP in 1948 to peak in 1974, economic growth in Belgium averaged 4.2 percent per year.  When the economy bottomed out in 1975, debt was only 54.4 percent of GDP, and did not reach 90 percent until 1983.  Yetfrom 1975-83, growth averaged only 2.2 percent per year.

For the other countries, it is even more obvious that the economies slowed well before reaching high levels of debt.  Clearly, Reinhart should look carefully to her own data before lashing out at Krugman.

Comments (2)Add Comment
written by Brian, May 27, 2013 3:07
I love the way economists look at data in isolation from the real world. A few points: in 1971 Richard Nixon unilaterally took the US off the gold standard, destroying the postwar Bretton Woods exchange system. For two years, the world limped along with a fixed dollar exchange, but it finally collapsed at the end of 1973. Currency started floating against each other. Also at the end of 1973 and into 1974 was the quadrupling of oil prices, which led to a global recession, and inflation at the same time, something Keynesian economics said wasn't possible. Stagflation resulted. Finally, the European Social Model, with employment discouraging, competitive economy destroying effects, was getting into high gear in the early 1970s. That's what led to the debt explosion in Europe, which continues today.
The USD is still pegged to the price of gold...
written by Mike Ballard, May 30, 2013 3:23
Gold is a commodity selling for over $1,600 an ounce. The USD is a commodity too. It's a promissory note, promising wealth either from natural resources or the labour time and skills of workers employed to produce wealth.

The workers are tied as a class to the notion that a 40 hours work week is normal. Of course, employers always want to stretch that norm especially with unpaid overtime. Nevertheless, it's not that enough wealth doesn't already exist (courtesy of the working class), it's that the wealth is not being funneled back to the workers who have traded ownership and control of it for a hand full of dimes, their wages (when they can sell their labour power).

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