Holy Snikes, this is HUGE, from Mike Konczal:
“In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, “Growth in a Time of Debt.” Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.
This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Post editorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.”
Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren’t releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right – it couldn’t be done.”
The three criticisms of Reinhart and Rogoff:
1. They selectively exclude years of high debt and average growth.
2. They use a debatable method to weight the countries.
3. A coding error that excludes high-debt and average-growth countries.
All of these bias the results towards their conclusion. If this is verified, it will be the biggest academic snafu since Professor Jeremy Siegel messed up his book Stocks for the Long Run relying on bad data.
This does not justify running huge deficits, but it also removes all of the urgency of the Austerity camp. A much more slow form of de-leveraging – what Ray Dalio calls “the Beautiful de-leveraging” — and not austerity is what appears to be what is called for.
I am watching this closely . . .
UPDATE: April 16, 2013 4:02pm
Reinhart and Rogoff respond here.
Jeremy Siegel is not having a good year (July 11th, 2009)
Researchers Finally Replicated , and There Are Serious Problems
Next New Deal, April 16, 2013
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff
Thomas Herndon | Michael Ash | Robert Pollin |
Political Economy Research Institute 4/15/2013