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Rogoff-Reinhart put cart before the horse

Carmen Reinhart, right, and Kenneth Rogoff


First, there were flaws with their math and methodology. Now its their thesis itself, as two more academic studies claim to have uncovered San Andreas-size faults with the most celebrated work of prominent Harvard economists Ken Rogoff and Carmen Reinhart.

The duo has acknowledged a spreadsheet error that resulted in the bad math, but continue to stoutly defend their finding that countries with public debt in excess of 90 per cent of GDP are doomed to years of lower growth rates than if their debt were reduced to more manageable levels.

Although they insist they have never advocated that governments embark on harsh cutbacks in the midst of tough economic conditions, there is no doubt that their research has formed the intellectual foundation for austerity and debt-reduction drives in Europe and similar demands from conservative voices in Washington and elsewhere.

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Now, Arindrajit Dube of the University of Massachusetts has crunched the corrected Reinhart-Rogoff data and come to a different conclusion: If anything, low growth leads to higher debt, rather than the other way round, because of higher social costs, more stimulus spending and lower tax revenue.

He takes issue with the Reinhart-Rogoff intepretation on algebraic grounds, but also rejects the lines they have drawn between cause and effect.

"A recession leads to increased spending through automatic stabilizers such as unemployment insurance, as well as discretionary stimulus spending," Mr. Dube writes in a brief paper. "And governments usually finance these using greater borrowing, as undergraduate macroeconomics textbooks tell us governments should do. This means negative economic shocks lead to increased debt. Casual observations suggest that this is what happened in the U.S. during the past recession, and in Japan during the 1990s."

The debt ratio, he notes, "is more clearly associated with the five-year past average growth rate, rather than the five-year forward average growth rate – indicating a problem of reverse causality."

In separate research, University of Michigan economist Miles Kimball and an undergraduate student, Yichuan Wang, also sifted through the Reinhart-Rogoff numbers and discovered "not even a shred of evidence" to support the linking of high debt to lower growth. "What I find remarkable is that despite the likely negative effect of debt on growth from refinancing difficulties, we found no overall negative effect of debt on growth," Mr. Kimball wrote in a blog post at Quartz.

RR have engaged in an increasingly testy public war of words with Nobel laureate and influential New York Times columnist Paul Krugman, their most vocal critic, along with a pack of other Keynesians who have argued that the middle of a crisis is no time to reduce government spending. The spat led RR (as they are known in economists' circles) to decry Mr. Krugman's "uncivil behaviour," for attacking them "in very personal terms, virtually non-stop."

In an interview with CNN's Fareed Zakaria, Mr. Krugman described the situation as "unpleasant, because Ken [Rogoff] is a magnificent economist. He's done fabulous work over the years. And then this one paper, which was thrown out hastily, unfortunately, is the one that has had the greatest impact on policy debate."

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Well before the math mistake and errors of omission surfaced, Mr. Krugman was deeply critical of both the findings and the undue influence RR's work was having in political circles, where it was eagerly adopted by fiscal hawks. But then came the first cracks in the research itself.

That occurred when a University of Massachusetts graduate student attempted to replicate the Reinhart-Rogoff results and failed. In a subsequent paper, he and two of his professors concluded "that coding errors, selective exclusion of available data and unconventional weighting of summary statistics" led to serious errors.

And now, more fuel for a bonfire that could burn for a while yet.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More


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