Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems

Stepping back for a moment, this thorough debunking of Reinhart and Rogoff's flawed paper means that now there is NO evidence that government debt exceeding 90% of GDP somehow negatively impacts growth.<p>Let me repeat that: there is NO EVIDENCE that more government debt causes slower economic growth -- just theories.<p>I wonder what all the government deficit scaremongers will say to this!<p>--<p>PS. For reference, the often-cited paper by Reinhart and Rogoff can be downloaded at <a href="http://www.nber.org/papers/w15639.pdf" rel="nofollow">http://www.nber.org/papers/w15639.pdf</a> and the new paper debunking it can be downloaded at <a href="http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf" rel="nofollow">http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki...</a><p>--<p>PS#2. An Excel typo was partly to blame for Reinhart and Rogoff's errors! Reminds me of the Excel typo that allowed the "London Whale" silently to rack up billions of dollars in unexpected losses at JP Morgan: <a href="http://baselinescenario.com/2013/02/09/the-importance-of-excel/" rel="nofollow">http://baselinescenario.com/2013/02/09/the-importance-of-exc...</a>

Is The Reinhart-Rogoff Result Based On A Simple Spreadsheet Error?<p>Oh my goodness, no. That's the least of it. They took all Commonwealth countries, found the periods where they had over 90% debt-to-GDP ratio, and EQUAL WEIGHTED them regardless of length or country.<p>I won't do a better job of explaining this than the article: "U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally."<p>Wow.

This actually isn't news. Questions have already been raised as this paper was never peer reviewed [1] (Jan 2013), which states:<p>&#62; According to their C.V.s [2], it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.<p>So I really don't know why anyone listened to this in the first place other than it furthered their pre-existing political agenda.<p>This is why any paper should be <i>required</i> to release:<p>- the <i>raw</i> data supporting it;<p>- the assumptions, exclusions and weightings made to produce the final data; and<p>- any code used for a model.<p>All of these issues are particularly problematic when it comes to climate science.<p>[1]: <a href="http://www.nextnewdeal.net/rortybomb/no-90-percent-debt-threshold-hasnt-been-proven" rel="nofollow">http://www.nextnewdeal.net/rortybomb/no-90-percent-debt-thre...</a><p>[2]: <a href="http://www.carmenreinhart.com/c.v./cv-in-pdf/" rel="nofollow">http://www.carmenreinhart.com/c.v./cv-in-pdf/</a>

Wait -- so apparently it's acceptable in economics to publish big important papers with broad-reaching public policy implications without releasing the data on which the paper was based? That would never fly in the sciences.

The most incredible and depressing aspect of this is that it will have no impact whatsoever on policy makers, leaders or their supporters.<p>Can anyone imagine Paul Ryan or Cameron/Osborne coming out and admitting their policies are based on nothing more than gut feelings unsupported by anything? What about the countless pundits who've spent years squawking about austerity? The notion is laughable.

It's interesting to note that one of the authors of the original paper, Ken Rogan, was the chief economist at the IMF 2001-2003. He also joined the group of 30 in 2008, an economic policy organization that is very influential in things like the Basel accords, IMF governance and matters of finance in Brussels.<p>Many of these organizations rely on private data to support their policy decisions, or rely on private analysis from similar organizations. That's hard to criticize because at least some of it would cause serious harm to the folks who provided it, or enable high finance players to front run policy actions to huge profit.<p>But what to make of an insider like that refusing to release data that had no market risk or legal restrictions in place. It's not hard to imagine that his primary goal was support of an economic philosophy and would have been just as happy to publish a paper that claimed high debt/gdp rations promote growth.<p>It certainly makes me wonder if this kind of approach is part of the culture in some of these policy and international finance organizations. If the data relied on by the IMF/ECB/etc as they've effectively reformed governments and imposed major budget changes can't be made public, then you're highly reliant on them to be ethical and extremely diligent.<p>If there's any significant amount of philosophy trumping science in the european restructuring, one begins to wonder if some of the weaker euro members are still actual democracies.

I see a lot of comments here to the effect that this means debt is a free lunch now. Would that it were so - we could get rid of taxes, as well as Medicare and Social Security withholding. And nix the Obamacare penalty. And, of course, buy everyone a pony.<p>Sadly, ponies are a finite resource until such time as the government figures out how to print more of them. Debt still has a multiplier less than 1 - far less, for large amounts of debt.<p>All this article means is the magic number where debt starts to cause deep hurting is somewhere above 90% of GDP.

Serious question - not trolling. Even if increasing the deficit does not affect GDP (and I'm in no position to even comment on whether or not I think it does) - how is that sustainable? I mean, AFAIK the argument behind increasing government spending is as simple as "it solves problems" - it provides help to those in need, affects the economy, etc. But why won't this at some point collapse? And if it will at some point collapse, why do we think politics will allow the government to behave any differently as we near that time? So again - serious question - I fail to see how we can expect government spending to grow without eventually consuming 100% of everyone's income or collapsing entirely (and I understand that many people may consider the former a good thing).<p>edit: And this may be because I don't know where the money comes from to begin with. If I keep getting bigger and bigger loans and there's no way my income will allow me to pay these loands back in the foreseeable future, then won't everyone just cease doing business with me at some point? Does "debt" in a government context act differently, and if so, why?

This surprises me - Reinhart and Rogoff are both very well respected economists, and neither is a culture warrior type - they've published enough (Including "This Time Its Different", a great book to understand the history of financial crises) that I almost wonder if there's more to this than meets the eye at first glance. I realize the first tendency is to "burn the witch", but I'd like to learn more.

Debt and growth are obviously separate entities that are hard to correlate. Intuitively it makes sense that debt doesn't inherently slow growth, and could even speed growth.<p>Reducing the problem to a personal level, you borrow money to buy a good car which enables you to work a higher paying job. This scenario makes the case that debt causes growth. From a policy standpoint if you borrow money for long term infrastructure and growth opportunities you could easily see debt as a net positive.<p>OTOH, you run up your credit cards to buy a better TVs or to buy 'friends'. In this instance debt can only lead to eventual poverty and ruin.<p>Which type of spending do you think is happening more often at a federal level?

Isn't it more plausible that public debt is caused by government deficit spending, which causes economic growth, but a temporary kind of growth that is only as good as the government's ability to continue spending?

Dropping back the frame for a bit - Jeff Sachs is on EconTalk this week, and he says what ( IMO ) should be the idea under scrutiny - employment prospects for people without college degrees have declined quite a bit since 1973. The present relatively high debt/deficit load was a result of an attempt to trade debt/deficits for higher employment using a ... somewhat intentionally-blown housing bubble. It didn't work. Something mysterious is "regulating employment down" in the system, and we don't seem to have a good handle on it. Tyler Cowen has posited a weakish "zero marginal product worker" hypothesis that does not seem to be easily decidable. Sachs' idea is that this has been developing since about 1973 and we haven't addressed it yet, and that this failure is a failure grounded in weaknesses of social science itself.<p>I can't find a more evenhanded and clear statement of the problem than his.

&#62; <i>In a new paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.</i><p>What's amazing to me is that no one, until the researchers spotlighted here, apparently thought to ask to see the data? Isn't this part of peer-review?<p>Things like this is why I love being part of the open-source community. People may brag about and diss each other's code performance to an unnecessary degree of hostility, but at least we can all check the code and run it for ourselves.

Putting on my tinfoil hat, I wonder if this error was intentional or unintentional? Was the errant conclusion known to be false by any who propagated it? If so, by whom and to what end?<p>For example, perhaps the US and Euro governments wanted to justify some tough measures of fiscal restraint and increase public support, and they wanted to keep it from being delayed until collapse was impossible to avoid. (See, I'm not totally jaded. But I can think of plenty of worse scenarios too.)<p>The "flaws" seem to be too large (and some deliberate) to be unintentional, but maybe I give too much credit. I've just noticed too much misinformation being spread by those who should know better, and coincidentally seem to benefit the most from it. I'm suspending my judgement until I learn more, but anyone else have any insights?

This article give a better explanation: <a href="http://www.businessinsider.com/thomas-herndon-michael-ash-and-robert-pollin-on-reinhart-and-rogoff-2013-4" rel="nofollow">http://www.businessinsider.com/thomas-herndon-michael-ash-an...</a>

Mainstream economics is centered around recommending policies that ensure bond-holders are paid. It all leads back to that. If there is too much debt destroying the underlying economy causing bond interest payers to default, lower rates. If rates go to zero, print money to pay the bondholders. If that causes inflation raise taxes and cut spending to pay the bondholders (a.k.a austerity), etc. The political economic dimension of the relationship between bondholders and the people who pay there interest is an important missing component from our understanding.

Randy Wray's view: <a href="http://www.economonitor.com/lrwray/2013/04/17/no-rogoff-and-reinhart-this-time-is-different-sloppy-research-and-no-understanding-of-sovereign-currency/" rel="nofollow">http://www.economonitor.com/lrwray/2013/04/17/no-rogoff-and-...</a><p>concluding paragraph makes so much sense:<p>"More than five decades ago, Abba Lerner gave the answer to this question. If there are involuntarily unemployed (we would add underemployed) people it means the deficit is too low. The government should either cut taxes or increase spending. It is certainly debatable which one is a better policy, but that’s beyond the scope of this paper. When is the deficit too large? When it’s over 3%, 7%, 10%? Again, there is no magic number and anyone who comes up with a universal number simply misunderstands the modern monetary regime and macroeconomics. In opposition to magic, Lerner proposed “functional finance”—the notion that the federal government’s budgetary outcome is of no consequence by itself, but rather, what is important is the economic effects of government spending and taxing. When total spending in the economy, including government spending, is more than what the economy is able to produce when employed at full capacity, the government should either lower its spending or raise taxes. A failure to do so will lead to inflation. So inflation is the true limit to government spending not lack of financing. Government debt is merely the result of government deficit and hence the same applies to debt as well."

Are we describing running the same formulae on the same numbers as 'replicating' these days?<p>Did real economists always consider these results provisional/dubious/bogus and the fact that they were used as the basis of policy is to the shame of our policy makers and press, or is the field of economics so messed up that research based on schoolboy errors can become the accepted view within the field?

Other discussion: <a href="https://news.ycombinator.com/item?id=5559483" rel="nofollow">https://news.ycombinator.com/item?id=5559483</a>

It seems clear to me that government debt in modern fiat-credit economies isn't really debt in the same sense that private debt is debt. It doesn't behave like private debt. I don't think debt is even the correct term for it. Maybe we need a new one.

Where do I find the paper that links GDP to sustainability or quality of life? You can have a compulsive debt driven society and still have strong economic activity, no? Or is "economic growth" really an indicator of economic sustainability?

Official response to the critique by Reinhart and Rogoff: <a href="https://news.ycombinator.com/item?id=5560829" rel="nofollow">https://news.ycombinator.com/item?id=5560829</a>

I think this is another example of why we must start with apriori approach to economics (and all learning for that matter) and only resort to posteriori methods as a secondary methodology. In this case we can prove logically that inflation reduces the investment capital available and that will always result in a decrease of production. If that is accepted arguing about how bad we can make something before X milestone seems a little less important.

The point is: don't copy Europe's austerity disaster.

<i>This is also good evidence for why you should release your data online, so it can be properly vetted</i><p>Reinhart and Rogoff may reach exactly the opposite conclusion, given the embarrassing publicity. For me this is an illustration of why publishing just your conclusions without data (or code, or whatever details are germane to your field) is so common.

They accidentially, the whole economy.

Mike Norman called out the flaws in Reinhart and Rogoff a while back: <a href="http://www.youtube.com/watch?v=JkKxN1H1P10&#38;list=UUZhuQXtpH2dXeEAX_5MKGow&#38;index=4" rel="nofollow">http://www.youtube.com/watch?v=JkKxN1H1P10&#38;list=UUZhuQXt...</a>

I wonder if this sort of error is less common in 2007+ thanks to the addition of tables.

I enjoyed reading "This Time is Different" I think their discussions of debt has motivated us to look at this concept in more depth. Maybe we can improve on their crude excel spreadsheet analysis. Then someone should do it!

&#62; In fact, [the past] tells us that a larger deficit right now would help us greatly.<p>That conclusion is quite a jump from Reinhart-Rogoff is flawed.

Apparently economics is harder than chess.

The correction actually bolsters the claim that more debt leads to lower growth.<p>0-30 debt/GDP, 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; 90-120, 2.4% and over 120, 1.6%

Does economics have peer-review? Excel is tolerated in an academic journal?