Great Leap Forward

The Absolutely Final and Definitive Destruction of Reinhart And Rogoff

Two UMKC students have provided what I think is the most destructive empirical work to date on the simply awful book and articles by Reinhart and Rogoff that purported to find a magical debt ratio beyond which economic growth plummets to negative territory. They are Matthew Berg and Brian Hartley and their piece is at New Economic Perspectives:

Before presenting a quick summary of their findings, let me make two preliminary notes. First they validate what Yeva Nersisyan and I first pointed out three years ago: the crappy empirical research of Reinhart and Rogoff was driven by a small number of outliers, and by confusion of causation and correlation. Yes, some countries–Japan most notably–have high debt ratios and slow growth. R&R aggregated in such a way as to give very high weights to those countries. And those countries had high deficits and thus high accumulated debts because growth was low. Hence, there was never any support for their claim that 90% marks a causal turning point.

Second, more recently when UMASS PhD student Thomas Herndon exposed the “errors” made by R&R in their empirical work, Professor Epstein of UMASS contrasted UMASS’s economics with that of UMKC’s as follows:

“And even the “left Keynesians” of Amherst don’t go as far as some of their peers at, say, the University of Missouri – Kansas City in dismissing the possibility of high deficits leading to inflation later on. “It’s almost a talmudic claim that since no country with its own currency can go bankrupt, no deficit can be bad,” Epstein says. “They’ve made important contributions, and a lot of them are my friends, but we try to look at things more critically and not assume there are absolutes.”

Well, what do you know. UMKC students can look at things critically, too! But note that no UMKC-affiliated faculty member (and probably no student) has ever said something as silly as “no deficit can be bad”. I do not even know what that could mean. Deficits can be bad. Very bad. Very very bad. A sovereign country that issues its own currency cannot be forced into involuntary default so long as it floats its currency. That is certainly a true statement–accepted by anyone who knows anything about sovereign currencies. Whether it is talmudic I have no idea. If you’ve got the magic porridge pot, you can provide the porridge.

Can too much porridge be bad? You betcha–just read the damned story. Inflation? Yes. Currency depreciation? Probably. Leave too few resources for the private purpose? No doubt. Create a nation of couch potatoes? You’ve got it. Bury everything under a thick layer of suffocating porridge? Read the story.

Where do people like Epstein get this stuff? I have no idea.

Aside from the fact that we do not say stuff like that, I do not know why this has become the ultimate test of just how crazy MMT is. Krugman goes on and on and on about how MMT claims “deficits don’t matter”. Epstein claims we say “no deficit can be bad”. Others claim we always support deficit spending, and the bigger the better. Aside from the fact that we’ve never said anything of the sort, how is it that this has become the litmus test for “serious” or “critical” economics?

Oh, Pete Peterson, that’s why. He’s got everyone on the left just scared to death that they’ll be pegged as too dovish on deficits. Yes, we all remember those attacks back in the 1960s, on those who were just a tad bit too dovish on the pinko commies supposedly in our midst. Deficit owls–those who reject the whole Pete Peterson lie–are just too far out there. Wouldn’t want to go there! We need to retain respectability–we fear deficits, we hate them, but we’ll accept just a bit of them as the lesser of evil evils.

Here’s the reality folks. We do not argue deficits cannot be too big. Nor do we argue that government ought to try to deficit spend. Deficits are mostly nondiscretionary–the outcome of the automatic stabilizers. We could ramp up government spending today, and cut tax rates, and might find deficits actually go down. Or up. Or stay the same. Who cares? Not Moi. Functional. Finance. That is what we advocate. Sensible policy, not arbitrary deficit or debt ratios. Full employment. Low inflation. Greater equality of distribution. More democracy. Accountability of our public officials. Prison terms for banksters. What’s wrong with that?

Ok, end of rant. Here’s a summary of the great work by (probable future PhDs) Berg and Hartley:

We find that the correlation between government debt-to-GDP ratios and future growth in Reinhart and Rogoff’s (2010a and and 2010b) dataset results from outliers which come from the country most suggestive of the hypothesis that slow growth causes high levels of government debt – Japan. This evidence strengthens and reinforces criticisms recently made by Herndon, Ash, and Pollin (2013) of research suggesting a negative relationship between government debt-to-GDP ratios and real GDP growth rates. As Reinhart and Rogoff (2013) recently and quite correctly noted, “the frontier question for research is the issue of causality.” We join Reinhart and Rogoff’s call for more research illuminating this important question. To that end, we use Reinhart’s and Rogoff’s dataset, as corrected by Herndon, Ash, and Pollin (2013). Following and reinforcing Dube (2013) and Basu (2013), we use LOWESS regressions and distributed lag models and find evidence suggesting that correlation of government debt-to-GDP ratios and future growth are much more likely explained by “reverse” causation running from slow GDP growth to high government debt-to-GDP ratios than by “forward” causation running from high government debt-to-GDP ratios to slow growth. Furthermore, what little evidence there is for forward causation appears to stem almost entirely from Japanese outliers. Because – as economists generally recognize – Japan is the clearest of all cases of reverse causation, this considerably weakens the argument for forward causation. In addition, we find tremendous heterogeneity on the level of individual countries in the relationship between current government debt-to-GDP ratios and future growth. This suggests that even if substantial evidence for forward causation is eventually discovered in cross-country studies, the effect will likely be small in size and unreliable, and therefore not relevant to economic policy decisions in any particular individual country. Our findings are suggestive, but not conclusive, and more research is needed. We suggest that simultaneous equations models may offer a way forward on the “frontier question” of causality.

Read the rest over at NEP.

15 Responses to “The Absolutely Final and Definitive Destruction of Reinhart And Rogoff”

Keith PilbeamApril 30th, 2013 at 2:00 pm

Nice post. While the Reinhart and Rogoff results are clearly flawed, the whole debate just focusing on debt is quite misleading. We need to consider also government assets – I can have a debt to GDP or 150% and government assets to GDP of 170% and be better off than a government with debt to GDP of 60% and government assets to GDP of 20%. So perhaps the focus should be on net asset to GDP ratios.

wkevinwApril 30th, 2013 at 2:29 pm

OK. If you have the best form of academic integrity, you would launch a study to verify (or not) the RR study. If some deficit level is too big, go do a study and find what number is too big.

JMarcoApril 30th, 2013 at 5:42 pm

Good summary of R&R fiasco.

Krugman keeps taking shots at MMT with his old "deficit don't matter" snipe. Sometimes I wonder if he is just jealous of how simple MMT can provide a better answer to present economic dilemma. He will write paragraphs on what is wrong with austerity but his only retort for MMT is "deficit don't matter" I would love to see you and him together at one of the Columbia Law School seminars.

I see that Warren Mosler is appearing June 6 at Columbia in a debate with Robert Murphy on "Modern Monetary Theory vs. The Austrian School"

thinkeconomicMay 1st, 2013 at 1:05 am

Just can someone explain without a political background or agenda how the final results are flawed? under any set of data growth is lower than what it should have been in a low debt scenario, be it -0.1 or +2.4
And assuming interest rates are low and will remain low is not economic research, it is political bargain. Any economist who understands misallocation of resources and has the ability not empirically, but by simply comparing to previous historical events, to observe it will tell you that.
No one can explain the French historically low interest rates, no one can rationally explain the rationale behind the prices the market is sending as signals. Assuming a low interest rate situation might be realistic on the short run, but it is irresponsible. The Japanese example will show that in some time.
Then you purposely miss the point on the nature of debt. What debt are we talking about? Are we using debt to revive dying industries and accompany market changes? or are we paying debt to pay the net cost of our previously unpaid obligations? Are we keeping alive a financial industry that is making taxpayers assume its risky positions?
Krugman's speech is not an academic one, nor an economic one, it is simple plain bipartisan poltics.

jonf34May 1st, 2013 at 2:54 am

Too bad for me but I had to give up on that NEP post. My math knowledge is not so good. But I take it that no one has yet proven empirically which way the directionality runs beyond any doubt. Japan is an interesting case: Little growth and huge debt to gdp. I hope someone is trying to figure it out. It is a puzzle that they accumulated all that debt and can't seem to shake the slow growth? Any guesses why? My guess is they did not spend enough and that leads to debt with no growth– sort of what we have going on here. And that, in my way of thinking, invalidates this whole study.

But my question beyond this is who cares? If Japan can issue all the money it wants (being cognizant of inflation) without issuing any bonds, who would notice?

It also seems sensible to stop making statistics out of apples and oranges, like private and public debt, sovereign and non sovereign debt, free floating and not. I have a disdain as well for the ancient data and wonder where it comes from and how good it is.

This whole thing with RR smells rotten to me. It is not what one should expect of Harvard professors.

L. Randall WrayMay 1st, 2013 at 11:24 am

I give up, cannot find the BobbiBi post–got lost in the Troll netherworld. In any event, the complaint was that Wray’s blog has too much Wray in it. And so BobbiBi is writing to Economonitor editors to have them ban Wray from the site because BobbiBi does not want to read so many blogs by Wray. Wray Wishes BobbiBi Good Luck With That and hopes she finds another masochistic pursuit.

L. Randall WrayMay 1st, 2013 at 11:29 am

Think: actually not that difficult. For Euroland, trouble on periphery causes run to debt of the center. Don’t worry, vigilantes will eventually attack France, too, and you’ll get high interest rates, too. Rogoff and Reinhart made lots of errors, fudged the data, gave wrong interpretation, got causation wrong. Shouldn’t be too hard for you to follow the critiques.

L. Randall WrayMay 1st, 2013 at 11:31 am

jonf: don’t worry about the tech details, i think you’ve got it right. Interest rate sovereign govt pays is a policy variable. And in any case, that govt can always “afford” the interest. Hence no need to cut back spending just because debt ratio is high. And hence growth rate is also a policy variable.

paulMay 2nd, 2013 at 11:19 am


I've been lurking around MMT for years now. Funnily enough, this continual refrain from people who should be the good guys that "MMTers say deficits can never be a problem, no matter what size" is the final confirmation to me that you're right, and that you've won the debate. If they had a substantial critique, they would use it. Instead, they keep repeating what is obviously an invention.

I like and respect Krugman, but I guess you would have to be a great soul indeed to win a Nobel prize, receive huge acclaim for your expertise and intelligence, and then turn around and admit that your understanding of money was wrong, and this fundamentally undermined all the rest of your macro analysis.

wkevinwMay 4th, 2013 at 1:31 am

WHAT IS THE NUMBER? LARGE A DEFICIT?)????? IF IT'S SO SIMPLE STATE IT! Dense prose only gets you points in the asinine world of university academics.

Good luck to you all.

L. Randall WrayMay 5th, 2013 at 2:53 pm

OMG wekeview: There is no such magic number. Can a deficit be too large? Yes. How can you tell? You are ramping up government spending beyond the full employment level; all resources are fully employed and govt can get more only by bidding them away from the private sector at ever-rising prices. So how can you tell? Beyond full employment and “true” inflation is accelerating. Dense? Prose? How dense is that?

fgwMay 7th, 2013 at 1:27 pm

You aren't being clear to me. I am familiar with Krugman's posts on MMT, but when you write:
"Interest rate sovereign govt pays is a policy variable. And in any case, that govt can always "afford" the interest. Hence no need to cut back spending just because debt ratio is high."
If high debt can be maintained without the need to cut back spending, then either "deficits don't matter", or the price to be paid for doing so is at some point prohibitive (when "Beyond full employment and "true" inflation is accelerating"). You seem to be saying both at the same time.

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PHåvard Halland is a natural resource economist at the World Bank, where he leads research and policy agendas in the fields of resource-backed infrastructure finance, sovereign wealth fund policy, extractive industries revenue management, and public financial management for the extractive industries sector. Prior to joining the World Bank, he was a delegate and program manager for the International Committee of the Red Cross (ICRC) in the Democratic Republic of the Congo and Colombia. He earned a PhD in economics from the University of Cambridge.