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Sunday, June 2nd, 2013

After Crunching Reinhart and Rogoff’s Data, We’ve Concluded That High Debt Does not Slow Growth

Author:     MILES KIMBALL and YICHUAN WANG
Source:     Quartz
Publication Date:     29-May-13
 Link: After Crunching Reinhart and Rogoff’s Data, We’ve Concluded That High Debt Does not Slow Growth
Stephan:   You will, I am sure, remember the fiasco of the Harvard economists Carmen Reinhart and Ken Rogoff, upon whose calculations much of austerity economic policy was based. How two far less prominent economists at the University of Massachusetts - Amherst found that Reinhart and Rogoff had made a simple miscalculation on their Excel spreadsheet, and that when it was corrected their main effect went away. That humiliating story has continued. And this is the next chapter. It is very interesting to observe that in spite of being completely discredited at this point, Republicans in the House still cling to austerity. Obviously the argument is not really about debt, it is about punishing the poor and dismantling what little social safety network the country has. This report gives the lie to the whole debt argument. It turns out that Reinhart and Rogoff made more than one mistake. Conservative economic theories and policy have no more reality than the Blues Brothers, and are far less entertaining. Click through to see the excellent charts.

Leaving aside monetary policy, the textbook Keynesian remedy for recession is to increase government spending or cut taxes. The obvious problem with that is that higher government spending and lower taxes tend to put the government deeper in debt. So the announcement on April 15, 2013 by University of Massachusetts at Amherst economists Thomas Herndon, Michael Ash and Robert Pollin that Carmen Reinhart and Ken Rogoff had made a mistake in their analysis claiming that debt leads to lower economic growth has been big news. Remarkably for a story so wonkish, the tale of Reinhart and Rogoff’s errors even made it onto the Colbert Report. Six weeks later, discussions of Herndon, Ash and Pollin’s challenge to Reinhart and Rogoff continue in earnest in the economics blogosphere, in the Wall Street Journal, and in the New York Times.

In defending the main conclusions of their work, while conceding some errors, Reinhart and Rogoff point out that even after the errors are corrected, there is a substantial negative correlation between debt levels and economic growth. That is a fair description of what Herndon, Ash and Pollin find, as discussed in an earlier Quartz column, ‘An Economist’s Mea Culpa: I relied on Reinhardt and […]

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