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Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff

Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

 

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff 's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

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Aykut Kibritçioğlu's comment, April 18, 2013 4:30 PM
"How a student took on eminent economists on debt issue - and won": http://www.reuters.com/article/2013/04/18/us-global-economy-debt-herndon-idUSBRE93H0CV20130418
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The Reinhart/Rogoff Mistake and Economic Epistemology

The Reinhart/Rogoff Mistake and Economic Epistemology | "EE" | Economics & Economists - İktisat & İktisatçılar | Scoop.it

By now, it is well known, at least in wonkish circles, that the economists Reinhart&Rogoff (R&R) made a number of errors in deriving their highly influential finding that debt-to-GDP ratios above 90% lead to slower growth.  Kudos to the various academics and bloggers who dug into this—particularly Herndan et al, who most recently found and documented the spreadsheet error and other questionable practices in R&R’s work, Mike Konczal who neatly summarized the critique, and Bivens and Irons, who back in 2010 showed the R&R thesis to be deeply flawed (and here’s a smart oped by Herndon’s co-authors).

 

Yet, as I noted in my brief review of this the other day, neither the older nor the more recent revelations are likely to have much impact on policy (or even, it would seem, on R&R, whose response has pretty been much been, “yeah, ok…but if we did it right, we still woulda got the same answer”).  In the first place, the fatal error in their work was not the spreadsheet error.  It was ignoring context (the unique, country, and time-specific reasons why is debt/GDP is rising) and thus conflating correlation with causality, specifically, periods when it’s slow growth leading to higher debt.

 

Why wouldn’t we expect a reaction from policymakers?  Because they’re using research findings the way a drunk uses a lamppost: for support, not for illumination.  If the R&R lamppost turns out to be wobbly, the austerions (or climate-change deniers, or supply-siders) will find another one.  In this town, I’m sorry to say, you can pretty much go think-tank shopping to buy the result you seek.

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Austerity economics only works if you make an Excel formula error

Austerity economics only works if you make an Excel formula error | "EE" | Economics & Economists - İktisat & İktisatçılar | Scoop.it

A new paper called Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff by Thomas Herndon, Michael Ash, and Robert Pollin from UMass Amherst tries and fails to replicate the classic work on austerity, Carmen Reinhart and Kenneth Rogoff's 2010 Growth in a Time of Debt.

 

Reinhart-Rogoff is the main research cited in favor of cutting public services and spending in bad economic times. It's a big part of why the local library is shutting down, why they're kicking people out of public housing, shutting down arts programs, slashing education and public transit, and laying off public employees. It purports to show that countries with high debt-to-GDP ratios of 90 percent or more are a "threat to sustainable economic growth."

 

In the new Amherst paper, the authors reexamine Reinhart-Rogoff's original data and conclude that the numbers don't add up. They show that Reinhart-Rogoff cherry-picked which years of high-debt GDP they measure, that they put their thumbs on the scales with "unconventional weighting" and made a "coding error" that "entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark." This last error -- literally the wrong formula in a spreadsheet cell -- badly skews the outcome.

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