The New Challenges to Reinhart and Rogoff
Advocates for debt reduction and austerity have had no more authoritative sources than Carmen Reinhart and Ken Rogoff. But last week, these two professors had to defend claims that errors in their research – ranging from a typo in a spreadsheet to the failure to include data from New Zealand – invalidated their much-acclaimed findings.
Reinhart and Rogoff are professors at Harvard University. Their research, published in a book, This Time is Different, and several academic papers, provided the pivotal academic support for calls for cutbacks in fiscal spending, notably by Paul Ryan (R-WI) in his 2013 proposed budget. The two professors have publicly warned U.S. policymakers that further increases in the deficit would lower future GDP growth.
Last week’s challenge to Reinhart and Rogoff came from three professors at the University of Massachusetts, who published a study, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.
That came after another study, Crunch Time: Fiscal Crises and the Role of Monetary Policy, which supported Reinhart and Rogoff’s findings, came under scrutiny.
No country can support an endless growth in its deficit. While these studies undermine Reinhart and Rogoff’s key results, they should not end the debate over the direction of fiscal policy. Deficit reduction must be a long-term goal for policymakers.
I will review the implications of these new findings carry. First, let’s look at the findings of the UMass and Crunch Time studies.
Those pesky New Zealanders
Reinhart and Rogoff’s key finding (published here) was that an advanced economy’s growth slows by approximately 1% annually once its public debt-to-GDP ratio exceeds 90%. The U.S. recently passed this threshold, enabling Reinhart and Rogoff’s research to gain widespread prominence.
A requirement of trusted academic research is that its findings can be independently replicated and verified. That is what the three UMass professors set out to do by obtaining the data, in Excel spreadsheets, that Reinhart and Rogoff used to produce their key result.
They uncovered three errors, each of which altered Reinhart and Rogoff’s results.
Reinhart and Rogoff looked at advanced economies from 1946-2009, but they omitted data for three countries: Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950). Of those, New Zealand was the most problematic. Its data alone reduced Reinhart and Rogoff’s 1% drag on growth to 0.7%.