NO, ROGOFF AND REINHART, THIS TIME IS DIFFERENT! SLOPPY RESEARCH AND NO UNDERSTANDING OF SOVEREIGN CURRENCY
Carmen Reinhart and Ken Rogoff came as close to celebrity status as an economist can ever come, with their book, This Time Is Different. They claimed that 800 years (!) of financial history proves that high government debt ratios lead to low economic growth. Governments all over the world took heed and downsized, adopting austerity that cost millions upon millions of workers their jobs.
But it was all a lie. Yes, a lie. They screwed up their data analysis. Like so many times before—think Larry Summers at Harvard, Chicago’s Gene Fama, or Charles Plosser at the University of Rochester—the economists reach results counter to intuition and the real world.
Their work doesn’t pass the smell test: if it smells like nonsense it probably is nonsense.
Yeva Nersisyan (my brilliant student and coauthor) and I critiqued their book soon after it came out; see here: http://www.levyinstitute.org/pubs/wp_603.pdf. To put our conclusions as simply as possible, we concluded that they didn’t know what they are talking about.
They argued that “high” government debt ratios—say, 90% of GDP—nearly invariably lead to slow growth and to financial crisis. Our debt hysterians took that and ran—using their book as justification for austerity.
We noticed that their data just did not add up. Leave to the side the silliness of simply aggregating across 8 centuries of experience, and adding up debt ratios of countries as disparate as the USA today or, say, Greece in 1932, let alone some feudal state operating on a gold standard a couple of hundred years ago. As I’ve remarked, any real historian would find the methodology ludicrous.
More importantly, they have no idea what sovereign debt is. They add together government debts issued by states on gold standards, fixed exchange rates and floating rates. They aggregated across governments that issue debt in their own currency and states that issue debt denominated in foreign currency. It is not even possible to determine from their book exactly what is government debt versus private debt.
When we couldn’t make sense of their results, Yeva wrote to them to get the data. After all, their book touted their contribution to good research by proclaiming they were accumulating all this data for the good of humanity. They ignored our request. I have heard from several other researchers that Rogoff and Reinhart also ignored their repeated requests for the data.
So, finally, someone was able to obtain the data. And as we suspected, it did not add up. Rogoff and Reinhart committed the cardinal sin of academics: while their purported results fit their theory, the data they supposedly used does not. Either they fudged or they erred. It really doesn’t matter. Their results were completely, utterly wrong. And their own data proves it.
You can read a summary of the expose here: http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems. The academic paper is here: http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/
The paper confirms what we suspected: the Rogoff and Reinhart research is crap. They threw out all the high debt, good growth countries. If you put those back in, it simply is not true that high government debt leads to low growth.
Was it intentional? Who cares. Motive is not the issue. Crappy research is the problem. And this was one of the most cited papers in recent economic research. Here’s the abstract from the critical analysis of their work:
We 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. Our finding is 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 Rogoff. 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. We 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.
Whoops. Do Over?
Here’s the bigger problem highlighted by Yeva and Me: they do not know what they are talking about. Sovereign countries that issue their own floating currency cannot be forced into involuntary default no matter what the debt ratio. For that reason, even if their results had not been tainted by bad research, it would have been irrelevant to the situation of any country that issues its own floating currency, such as the USA, the UK, Japan, and so on. No matter what the debt ratio, a sovereign government that issues its own currency can choose to grow the economy.
That was the lesson that should have been learned. Here’s how we ended our critique:
When it comes to a sovereign government’s budget deficit and debt there are no magic numbers or ratios that are relevant for all countries and all times. There are no thresholds that once crossed will be unsustainable or lead to lower growth. The government’s budget balance in most advanced nations is highly endogenous and is merely the other side of the coin of the nongovernment sector’s balance. The public deficit is the result of the private sector’s willingness to net save and net import.
Modern monetary theory is often interpreted as claiming that there is no real limit to the government’s ability to spend or that the government should run up deficits. Of course there is a limit to the government’s ability to spend and of course it shouldn’t spend an infinite amount. Yet, the sovereign government is not constrained financially, which means that it can never face a solvency issue. Still, it is certainly constrained in real terms meaning it can face another kind of sustainability issue: how much of the nation’s resources ought to be mobilized by government? Given the level of resources that the nongovernment sector wants to mobilize, how large should the government’s deficit be to mobilize the rest?
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.
Lesson to learn: ignore the Ivory Tower economists who recommend austerity and warn of “unsustainable” budget deficits in the case of sovereign currency nations. They know not of what they speak.
47 Responses to “NO, ROGOFF AND REINHART, THIS TIME IS DIFFERENT! SLOPPY RESEARCH AND NO UNDERSTANDING OF SOVEREIGN CURRENCY”
I think it's better to say that one should never trust econometric research that goes beyond simple regressions unless it's been peer reviewed, ie the DATA reviewed. Reinhart and Rogoff held off on releasing the data until they thought nobody would care anymore to really dig into their results. They are both academic frauds.
"Was it intentional? Who cares. Motive is not the issue."
I disagree — I think you are letting them off too easy. It beggars belief that this was mere incompetence. The impact of mere incompetence should be random. And the lame, incoherent defense R&R have offered clinches it for me — this was malfeasance of the lowest order.
People have died, and will continue to die, as a result of this obvious hatchet job. If the professional economic community wishes to salvage any credibility at all, it must bring R&R to account.
I agree they should be held accountable. Motive is very hard to determine and at this point I do not have nearly enough evidence to conclude that they intentionally produced crappy research. But crappy is certainly reason enough to throw it out. Of course, Yeva and I had already shown it was crap research because the authors did not distinguish between truly sovereign debt and nonsovereign debt.
Oh, and I might note that Freddie Mishkin apparently now publishes on his website who pays him to produce his research (remember his affair with the Chamber of Commerce in Iceland, when he was paid to produce false conclusions about the state of bank supervision in Iceland right before its collapse). So now maybe R&R will now put disclaimers on their research.
Actually, motive is an issue. Take a look at their work history, and see if the name Pete Peterson pops up — as well as other right-wingers whose goal is to widen the gap between the rich and the rest.
Thank you for the great article.
You have made a pretty clear case against austerity and the research of some economists. If debt does not matter for a nation with a free floating currency as these governments will never face a solvency issue, is there no consequence for a lack of any fiscal prudence? Could continued deficits and money printing potentially lead to a lack of confidence in a currency, which could kick off hyperinflation? This is not a problem for a reserve currency if there no liquid alternative to that reserve currency but what about for many other countries out there?
Right on, Blue!
Motive and intention are crucial here. These asswipes didn't just write a paper for some musty journal that only a few academicians would ever read and debate at sherry hour in the common room. They knew their work would be used to justify policy, and they watched and participated in touting their work as a justification for policy.
The fact that we now see clear evidence of cherry picking and selective weighting should shift the presumption of dishonesty on to them, their institutions, and their supporters. We need to stop supporting this treason. Yes, treason: The point of this work has been to justify policies that undermine our democracy and sovereignty by providing cover to the bankers and politicians who want to establish a new global plutocracy.
Again, Blue is right–These people have blood on their hands. The lives destroyed figuratively and literally–look at the rise in suicides and stress-related deaths–are in large measure due to the policies their lies were used to justify.
From R & R's response:
"we are very careful in all our papers to speak of “association” and not “causality”
Great post Randy. this will be the talk of DC during the annual meeting. What a fall!
Even if that study is flawed, it does not follow that wasteful government spending is good. Government monopolies are seldom efficient.
open access, open data, open science
at least the Excel error could have been avoided, if the data would be shared
Open Access to Data: An Ideal Professed but Not Practised
Out of the sample, 435 researchers (89.14%) neither have a data&code section nor indicate whether and where their data is available. We find that 8.81% of researchers share some of their data whereas only 2.05% fully share.
BTW, interesting place, that Harvard.
Cheat as an undergrad? Forced to withdraw.
Cheat as a prof? crickets.
I think there's more than sloppiness, cavalier treatment of data, TAs, failure to make checks that should have been built into their procedures, or other issues of that sort operating here. The "axe to grind" bias of the research is very transparent now that the data are public. They made methodological decisions designed to get the result they wanted.
Once they got it, they apparently had no interest in challenging it to see if it would hold up under various tests. It was a surprising result bound to be questioned by others who found their conclusion uncongenial to their views. Care for their own reputations, and for the people their result was likely to affect, as well as for the demands of objectivity should have gotten them to perform their own challenges to their findings BEFORE they published. Had they done this kind of checking there is no way they could have made the errors we now see.
Of course, they did no challenging of their on work. When they began to get criticisms from MMT quarters pointing out that you cannot lump together fiat currency sovereigns and nations on gold or other commodity standards, nations using other people's currencies, nations pegging their currencies to others not their own, and nations owing debts in currencies not their own, they still persisted in their claims for the validity of their findings and refused to go and look at their data again to do the simple dummy variable analyses that would have immediately shown whether their conclusions held up when they took these factors into account. And all the while they held their data close so no one could second guess based on their own data. Taken together this is bias. It is not science. It is more like a case made by a lawyer or a propagandist who wants to prove a point, then it is like a scientist or any other investigator who is trying to find out the truth.
I think they were after power, prestige, money, and status, and not the truth. They are corrupt, and their corruption, the corruption of the plutocratic elite they serve, and the corruption of neoliberal economics is what this incident is about.
800 years worth of data proves this? That, of itself, is a fraud, sorry. Professional economists surely know such a claim is utterly nonsensical. So I would hold them accountable for many deaths due to forced austerity.
Awesome professor! I quoted you calling bullshit on RR well over a year ago. I have since rubbed my friends' and colleagues' noses in it (vagarious told you so). Thank you for making me look smart.
If this can happen in today's world "Seven seismologists convicted of manslaughter for failing to adequately warn citizens of 2009 quake" http://www.salon.com/2012/10/22/earthquake_scient…
Why can these two "economists" be jailed for life for destroying so many people's lives by promoting austerity?
Randy. What a pity Robert Pollin believes governments have to finance deficits by borrowing as revealed in this BBC interview today (apologies if you can't get access from outside the UK)
Oh well, I suppose at least he can analyse data!
After the interview the BBC business reporter ended by promising to get hold of Rogoff at some future date to give his side of the story. Depressingly he pointed out that Rogoff was a regular guest on the show (BBC Radio 4's Today programme, which is the foremost 'serious' news radio show in the UK). This personifies the BBC’s credulous reporting of economics in general. You would have thought that they would have broadened their horizons a little when faced with a profession whose mainstream signally failed to predict the crisis of 2008 and, now, has signally failed to understand the past! Such lazy journalism fails us all. That’s why I read blogs like yours Randy and that of many other non-mainstreamers. Keep up the good work.
One last small pop at the BBC to close… They often use the term 'sovereign debt crisis' when talking of the Euro. Putting aside the MMT viewpoint that sovereign debt never can reach a state of 'crisis', surely this phrase is a complete misnomer for Euro zone countries? (i.e. their debt is not denominated in a currency over which they have any sovereignty whatsoever….perhaps it should be called the 'non-sovereign debt crisis'?)
So that explains why Italy, Belgium and Japan have such fast growing economies.
Tom: are you paying attention? For Japan, the causation is reverse: slow growth leads to budget deficits. Note their financial crisis came before running up huge debt ratios. For Euroland countries, they are not sovereign currency issuers. I suspect you are very late to the game, here. Read more, comment less. You know the Twain remark?
Well, I think you should read and study more and pontificate less.
I believe you're discussing "This Time is Different," the theme of which is about how financial crises are similar regardless of many factors such as whether a country is "sovereign currency issuer". And they demonstrate that very well, however much to your dissatisfaction.
If you want to instead examine only the countries that have followed your prescription for how to run monetary policy, then no past crises fit. Many crisis countries were monetizing their deficits, and that's obviously been a common precursor to crisis, but no country has ever used flexible tax rates to target inflation. Your argument comes down to a hypothesis that the many deficit-monetizers who have had crises could have avoided such with your suggested tax policy. That's not a question you can expect an empirical study to address.
There's two main things I think you and your crowd are missing about the higher debt lower growth story, which even R&R's detractors supported. The first is the difference between a country with a store of fiscal and currency credibility and a country without. Take for an example of without, Italy before the EU, or for a simpler case Turkey since it still has its own currency. Deficit monetization was an inflationary, crowding-out disaster for Turkey and absolutely partly to blame for the 2001 crisis (out of control credit expansion also playing a role). Fiscal consolidation was crucial to Turkey's turnaround. Even the Keynesians at the IMF and World Bank will tell you so. Japan, the UK, the United States are different – they have large stores of fiscal and currency credibility that leads people to hold and accumulate their currencies and assets denominated in their currencies despite rapid money supply growth. Thus, money supply growth has a much weaker effect on inflation in those countries, the way it does in Turkey. It does however have important effects such as sending capital abroad, discouraging savings, inflating asset prices and wealth disparity, inflating home prices and rents, etc.
The second thing you are missing is that besides debt being a hamper on growth (by creating an elite who simply collect rent on their capital from the public till without investing) the policies that create high debt also lead to low growth over the long term – (eg rapid credit expansion followed by credit implosion).
Uhmm, No tom, you’ve got it quite wrong. Read more, comment less and you will then display far less ignorance. Before the Euro, Italy never faced default risk. Once it lowered interest rates, it got out of any spiraling debt “problem” and because it was sovereign, it could choose its debt ratio. Ditto Turkey. This has nothing to do with following MMT’s monetary policy recommendations. Sovereign countries with own floating currencies face no insolvency risks. And if you want to be the last known supporter of R&R’s crap research, go ahead and do it, to your eternal discredit. Oh, do you have the courage to include your last name and affiliation? Mine is there, pontificator!
Thanks Blue. I just loved this part, which comes as no surprise of course since all austerity roads lead to Pete Peterson’s Billions:
Reinhart, described glowingly by the New York Times as “the most influential female economist in the world,” was a Senior Fellow at the Peterson Institute for International Economics founded, chaired, and funded by Peterson. Reinhart is listed as participating in many Peterson Institute events, such as their 2012 fiscal summit along with Paul Ryan, Alan Simpson, and Tim Geithner, and numerous other Peterson lectures and events available on YouTube. She is married to economist and author Vincent Reinhart, who does similar work for the American Enterprise Institute, also funded by the Peterson Foundation.
Kenneth Rogoff is listed on the Advisory Board of the Peterson Institute. The Peterson Institute bankrolled and published a 2011 Rogoff-Reinhart book-length collaboration, “A Decade of Debt,” where the authors apparently used the same flawed data to reach many of the same conclusions and warn ominously of a “debt burden” stretching into 2017 that “will weigh heavily on the public policy agenda of numerous advanced economies and global financial markets for some time to come.” (Note that not everyone associated with the Institute touts the Peterson party line.)
Funny you should mention that…
Its pretty hilarious that so many people are so eager to jump on the statistical, calculation and experimental design errors in this case, but have no interest in the same in regard to climate research. It is very disturbing to see the extent to which all sciences have become both highly politicized and highly unreliable, with numerous cases of outright fraud and serious misuse of data and statistics. We are going to need some independent method of ensuring that all data used, all statistics used, all design choices and all calculations are fully transparent and immediately available to the public so that results can be checked and replicated, and that research is not relied upon for policy until it has been certified by independent, well-qualified statisticians and experimental design experts as credible and that all possible shortcomings are taken into account.
If total spending is beyond full employment level, then you will be operating the economy beyond full employment (you’ll have more job vacancies than people looking for jobs), plant and equipment operating beyond design capacity, and a bidding war for resources that is driving up prices–in other words, inflation.
Well, yes and no. IF a country has a sovereign fiat currency AND IF all its debts, external as well as internal, are directly payable/ serviceable in that same sovereign fiat currency, THEN, there can be no question of involuntary insolvency or hyperinflation, at least not under any macroeconomic state of less than or equal to potential GDP (i.e., full employment). Moreover, even under "hothouse" conditions, hyperinflation would be extremely unlikely. Indeed, virtually the only condition which is sufficient for hyperinflation is if, for any reason, a country's debts are payable only in hard currency (i.e., a foreign currency), while that country has no effective way of obtaining enough of that hard currency to service those hard- currency debts. For example, the Weimar hyperinflation could have never occurred if the Allies had accepted a pre- fixed number of Reichmarks as payment in full of the Reparations. IF they had, all Germany would have had to do would have been to print up a bunch of Reichmarks immediately and paid it all off! But the Allies would have none of that! They demanded 132 billion GOLD marks, or, equivalently, about $33 billion, a sum which was several times Weimar Germany's GDP.
Thanks for a good reading. it helped feel some rational people still around.
I would add it is all about good sense… that is also what economy and economist is all about, not a pure science but a social science. But knowing numbers help for a good sense… not the cse it seems.
If it was not true it would also be funny to remember the 17 highly qualified and educated finance ministers deciding what to do with Cyprus… SENSE, good sense please comeback
I was reminded of my high school day reading: How to Lie with Statistics. Wonder if I can return the RR book for full refund.
To see where Rogoff's, and by extension, Reinhart's allegiance lies, see the open letter Rogoff wrote to Stiglitz, when he was the Economic Counsellor and Director of Research at the
International Monetary Fund, to criticise his Globalization and Its Discontents: http://www.imf.org/external/np/vc/2002/070202.htm
For the highlights of the open letter that read like a farce, given the 'sloppy statistical analysis' in RR's own 2010 paper, see: http://thefaintofheart.wordpress.com/2013/04/22/r…
L. Randall, I can see how you are right about Sovereign currency issuers not facing insolvency problems. However, you did not address the parts of Tom's post which I, at least, found more interesting.
In reference to money supply growth (presumably of an "excessive" nature) –
"It does however have important effects such as sending capital abroad, discouraging savings, inflating asset prices and wealth disparity, inflating home prices and rents, etc. "
How much money supply growth would you categorize as "excessive", and would you agree that it can have the kinds of consequences claimed in the quote above?
This may still important to consider when making policy choices.
Also, would you agree that the the Sovereign issuers are at an advantage compared to the smaller countries in terms of their ability to use expanded debt and/or money supply to solve their economic problems?
bruce you are focusing on the wrong thing–money supply–which is Friedman’s school. Yes too much govt spending can have some undesired effects. Certainly beyond full employment it is not a good idea to ramp up spending more (unless you raise taxes to release resources from the private sector).
Are you saying money supply growth only comes from government spending in excess of tax revenues?
How do you know when you have reached full employment?
I have read that in the 1920's the unemployment rate dropped to 2.9% and during the dot-com bubble we had t down to about 3%.
Those were obviously unsustainable bubbles that, let me know if I'm wrong, were caused by excess money supply in the private banking/financial system, not by excess gov't spending or low gov't debt. So it seem like monetary policy is an important consideration, not just government debt load and gov't spending. I realize this is a step away from R&R's thesis about high gov't debt slowing growth, but it seems important to understand.
I have also read that in 1950-1975 the percentage of the population employed (not the same as unemployment rate) was about 31%, whereas 1976-2011 we had about 44% of the population working. During the earlier period families could be supported by one wage earner, now they can not be, so I'm not convinced this is really progress. Is this a result of policies aimed at achieving full employment (definition of this term?).
Bruce: No, of course banks create “money” (deposits) as they make loans. (Technically, this “leverages” currency since banks promise to convert on demand.)
Variety of definitions of full emp; Beveridge=more vacancies than seekers. Mine: a job offer for anyone seeking work.
Don’t use emp/pop ratio. You want to do it emp/pop of working age. Peaked before crisis, now far below. But that was not full emp–still had probably 12-20 million of working age who would be expected to be working.
To say we should ignore economists who recommend austerity and warn of “unsustainable” budget deficits in the case of sovereign currency nations is a bit much. The theory that infation is the true limit to government spending not lack of financing is also a reach. The real world is not so simplistic that the present and the future at some point do not intersect. Financial promises made today to be paid in the future eventually have to be fulfilled or the system begins to crumble.
When this "crumble" occurs the economy is effected in a negitive way. A massive increase of the velocity of money caused by people no longer wishing to hold it can kick off rapid inflation, this happens when a loss of faith in a currency takes place. Thus I contend that austerity has been poorly defined and has been given a bum rap. On my blog site I have posted about this subject;
Regarding the employment figures quoted above: BLS data for pop. 16 y/o and older, so I tried to do it the way you suggest. The data goes back to 1948, and from there to about 1976 it varies in a horizontal range. After 1976 it moves up into a higher and volatile range. Which I suspect has to do with bank credit availability during a boomish period, but maybe other things played an important role as well. However, that higher fraction of 16+ y/o's working were not at the same standard of living as the workers in the past. That bugs me so I want to understand it.
What do you propose as a means to achieve full employment by your definition?
Bruce: woment went into the labor force, of course.
my path to full employment. Glad you asked. Job guarantee, of course.
Yes, true about women entering the labor force during the 60's and onwards. I don't have stats to refer to for numbers, but let's say that accounts for all of the increase.
It seems to have placed downward pressure on wages, or at least on growth in wages. Which makes me wonder to what extent this is a zero sum game. Once you have the labor needs of all the production required to support consumers and maybe do a bit of exporting covered, adding any more workers can't increase profits further so total wages can't grow.
How true is that? As inventive people work to improve the various means of production it becomes more efficient and fewer people are required.
Now you're just being glib.
Um, Sorry about the glib accusation. I just looked up the job guarantee concept and found that H. Minsky proposed it some time ago and that it is associated with the Kansas City School of economics. Found the Wikipedia entry.
I like the idea. There is always a lot of "hands dirty" work that needs to be done maintaining public infrastructure and such. That approach combined with measures to avoid booms, and thus the thing that follows them, would make for a pretty good system.
This is all pretty amazing. Larry Summers, Eugene Fama, the BBC – they're all idiots, drawing salaries that ought to belong to L. Randall. Not only that, but the ice in Greenland is actually getting thicker every year. Gee whiz – thanks for setting me straight.
Mazo: 2 pretty big jumps there! I cannot see why I should get the salaries of those on the Wall St payroll. Nor why that has anything to do with global warming.
Harvard is the only school among my academic affiliations where I found students more interesting than faculty (at least in the social sciences; I am not familiar with their pure science departments). About six years ago I published an article, "Don't Send Your Daughter to Harvard", suggesting to parents thirty or so other colleges that, by my metric, were as good as or better than Harvard. (The title is a play on an inside joke during the period before Harvard matriculated women.) Harvard's main advantage now is its tuition policy, but that is beginning to be emulated elsewhere as well.
Well, those harvard econ profs certainly know how to make a splash in the media! Unfortunately, it’s usually negative publicity but I guess that works, too!
Behind the "Global Austerity Fetish" propoganda coming out from mostly the US, are two facts:
1) MNC corporations want a level playing field in all countries,
2) Banks have a hangover. They want everyone else to faithfully nurse existing debts to the exclusion of all else.
Statistics is like a Bikini: It reveals a lot, but what it conceals IS VITAL. LOL