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Home Publications Blogs CEPR Blog The University of Massachusetts Econ Department: How We Know Reinhart and Rogoff Were Wrong

The University of Massachusetts Econ Department: How We Know Reinhart and Rogoff Were Wrong

Written by Dean Baker   
Wednesday, 24 April 2013 10:40

The worldwide debate over fiscal policy and austerity was turned upside down last week by a paper co-authored by a University of Massachusetts grad student Thomas Herndon and two professors, Michael Ash and Robert Pollin (HAP). The paper uncovered serious calculation in errors in an important paper by Harvard professors Carmen Reinhart and Ken Rogoff (R&R).

The Reinhart and Rogoff paper, “Growth in a Time of Debt,” has been widely cited in policy debates in the United States and around the world as providing the basis for cutting deficits even at a time when the economy is suffering from large amounts of unemployment and interest rates are extraordinarily low. Ordinarily economists would argue that these are exactly the circumstances in which governments should undertake aggressive stimulus measures. Government spending can both boost growth and increase employment in the short-run, and also lead to long-run benefits insofar as the stimulus takes the form of investment in infrastructure, research and development, and education.

The Reinhart and Rogoff paper was used to argue against increased spending because it purports to show that high ratios of debt-to-GDP lead to large falloffs in growth. The implication of the paper is that the United States and other wealthy countries are at debt levels near a tipping point where further increments of debt can lead to decades of slow growth.

The moral of the Reinhart and Rogoff analysis is that we have no choice but to live with the pain of high unemployment and slow growth now, since the eventual cost in terms of a prolonged period of slow growth and high unemployment would be so awful. This is the sort of reasoning behind the austerity plans that are leading to double-digit unemployment across Europe and slow growth and high unemployment in the United States.

The paper by HAP was a body blow to the intellectual foundations for these policies. When corrected, the R&R analysis provides no basis for the concerns about a high debt cliff that they had been pushing for the last three and half years.

Following on this analysis, Arindrajit Dube, another professor at the University of Massachusetts, put out a paper that examined the direction of causality between growth and debt. He found a very strong causal relationship between slow growth and high debt. It turns out that high debt is a very strong predictor of poor growth in the prior three years. However, debt tells us almost nothing about future growth. In other words, R&R got the story backward, weak growth leads to high debt, not the other way around.

It is not an accident that this work came from the University of Massachusetts. The economics department at the UMass stands largely outside of the mainstream of the profession. You would need scuba gear to find it in standard departmental rankings. None of its faculty are fellows at the National Bureau of Economic Research, a credential that is a virtual prerequisite for employment at elite departments.

UMass has followed a different path that is not likely to gain it plaudits from the mainstream of the profession. It owes its current status to a group of progressive faculty, led by Harvard Professor Sam Bowles, who left some of the country’s top departments in the early 1970s to form a progressive department at UMass. While the original group has all since retired or moved on, the department continues to maintain its character as a center for progressive economics. [Disclosure, many of the faculty and grad students at UMass are friends and colleagues.]

As a result, the economists at UMass are less willing to adhere to the norms of the mainstream of the profession. They are more willing to challenge the received wisdom from the top economists in the profession without according them the deference they typically receive from less established economists.

For example, one prominent mainstream liberal economist complained that HAP should have shared their paper with R&R before going public. While it may have been polite to notify R&R of a paper that exposed their calculation errors before sharing it with the world, if R&R had advance notification they would have almost certainly made efforts at damage control to minimize the impact of HAP’s findings.

Economists concerned about their standing in their mainstream of the profession likely would have gone this route. HAP wanted to ensure that their paper would provoke a serious debate about R&R’s case for austerity and were less concerned about professional etiquette.

The fact that departments like UMass exist is incredibly important. The reason we are in this economic crisis is because of the extraordinary conformity of thought among top economists in the years leading up to the collapse of the housing bubble. In the summer of 2005, when all the alarm bells should have ringing at top volume, the Fed devoted its annual meeting of central bankers to an Alan Greenspan retrospective. They debated whether he was in fact the greatest central banker of all time.

The culture of sycophantism might be too deeply ingrained in the economics profession to expect any changes any time soon. For this reason we badly need departments like UMass (the New School, the University of Utah, and University of Missouri-Kansas City are three others that fit this bill, as is Colorado State University, where I spoke last week) to expose the consensus within the profession when it strays too far from reality. The R&R debacle shows clearly the importance of this dissenting voice.  


[Note: The full identification of the University of Utah was left out of the original post, as was University of Missouri-Kansas City and Colorado State University. I blame an Excel spreadsheet error for the former.]

Comments (8)Add Comment
uh, UMKC?
written by Payam, April 24, 2013 1:15
Umass, Utah, new school AND UMKC are the 4 universities with heterodox phd programs. Thanks.
written by Fred Lee, April 24, 2013 1:52
Regarding the final paragraph in Dean Baker’s comments on UMass exposure of Reinhart and Rogoff:

"The culture of sycophantism might be too deeply ingrained in the economics profession to expect any changes any time soon. For this reason we badly need departments like UMass (the New School and the University of Utah are two others that fit this bill) to expose the consensus within the profession when it strays too far from reality. The R&R debacle shows clearly the importance of this dissenting voice."

The absence of UMKC is particularly notable. Is it because UMKC does not challenge the hegemony of mainstream economics; does not challenge, reject, and work on replacing mainstream theory; does not work at building alternative academic/professional institutions to mainstream academic/professional institutions? Or is it because UMKC does all of this much too well? In particular I would like to know why I am not considered a dissenting voice.
UMKC is a cult
written by Protesting too Much, April 25, 2013 4:16
The absence of UMKC initially, though DB is too polite to say this, was probably for the best. UMKC has this cultish quality to it-its like Austrianism in reverse. Its strange, many of the people there, Jan Kregel for example-are extremely distinguished and brilliant thinkers. But when it comes to any discussion, the conversations seem to go like this.

Policy maker/straight Economist: "What is the right amount of debt, you see I.."
Policy maker/straight economist: "But..."
Policy maker/straight economist: "Its a legitimate question, I'd like to know empirical..."

etc. etc.

Why should anyone take these people seriously?
UMKC are one of the good guys
written by Stephen, April 25, 2013 10:35
Dear Protesting too Much,

I think you should direct your energy much more at the disgrace that is mainstream economics rather than blackening the name of UMKC based on a conversation with an MMT supporter. What Jamie Galbraith called the shamed profession of economics was found out when it completely missed the crash of 2008, and now again by the revelation of R&R's spreadsheet 'error'.

And where do UMKC stand in all this? Their number includes one of the very few academic economists who predicted the crash - Michael Hudson (please look up the 'Bezemer 12', which, by the way, includes one Dean Baker). They also were highly critical of R&R's methodology from the get go. Please see Wray & Nersisyan's 2010 paper:

"Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff"

MMT is Austrian econ in reverse
written by Frederick, April 25, 2013 11:09
It's not surprising to see MMT/UMKC supporters attacking Dean for leaving out UMKC in the original post. They inhabit internet comment sections and troll anyone who disagrees with them. They're exactly like the Austrian economics fanatics even if they're perhaps a little bit smarter.

In the end though, MMT is all about politics. Its descriptive aspects are only intended to confirm a preconceived policy bias. No different than Austrian economics, but veering all the way to other side of the political spectrum.

Anyone who reads Wray, Fullwiler, Kelton or Mike Norman regularly knows how nasty and crude they can be. If you don't agree with the MMT religion you're one of the bad guys. And that's all it really comes down to - belief in their state theory of money ideology.

Personally, I am surprised that an economics department has allowed itself to become dominated by such ideological views. Not only is it teaching an erroneous message to students, but its doing so in a way that undermines the credibility of a economics department.
Are you serious?
written by goose, April 25, 2013 1:18
The reason we are in this economic crisis is because of the extraordinary conformity of thought among top economists in the years leading up to the collapse of the housing bubble.

I really hope you don't believe that.
Please stick to the facts
written by Stephen, April 25, 2013 3:14

Wray, Fullwiler and Kelton nasty and crude? Oh come on. I'll give you Mike Norman though, but then again he isn't UMKC, nor even an academic.

In the week that R&R were hoist by their own petards, and, by extension, vast swathes of the economics mainstream, you have some gall to rubbish one of the 'outside' econ departments that called it right from the outset.

Far from being run by ideologues with a biased agenda, the UKMC economists go to great pains to decouple what MMT has to say about how the monetary system works from the political possibilities it opens up (e.g small vs big government). Moreover, unlike R&R and their ilk, the UKMC economists work on MMT is strictly empirical.

They do, quite clearly, speak for the 99% and are robust in their criticism of the sorry discipline that mainstream economics has become - one dimensionally subservient to rampant neoliberalism. If think that's not justified then I suggest you need to get out more.
written by Frederick, April 25, 2013 3:41
You've really swallowed the MMT kool-aid and then gone back for seconds.

Wray is one of the most insulting and nasty writers on the internet. He is constantly writing childish and demeaning blog posts. Fullwiler has a well known reputation as a short tempered child. If you're not that familiar with their actions then maybe you don't know as much as you think (which is obvious).

MMT is not a small government agenda. MMT is almost entirely based on a big government agenda. Their brand of economics is dominated by Marxist teachings (Bill Mitchell and many other MMTers are more Marxist than anything else by admission) and Randall Wray learned most of what he knows under the tutelage of Hyman Minsky who was a well known socialist. The endgame in MMT is two things - persistent budget deficits and their Job Guarantee. If they had it their way they'd hire every last unemployed person and give them a living wage, full health benefits on the government dole. If you want to pitch that as "small government" then be my guest, but let me know when you wake up to the reality of what MMT is.

They're very good at playing both sides of everything, but at the end of the day MMT is dominated by extremist left wing positions in much the same way that Austrian economics is dominated by ridiculous right wing anti government types.

Wake up.

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