There is a bit of a scandal brewing in economic policy circles – it seems that an important Reinhart and Rogoff result cannot be replicated. Matthew Yglesias explains the basic problem:
You’ve probably heard that countries with a high debt:GDP ratio suffer from slow economic growth. The specific number 90 percent has been invoked frequently. That’s all thanks to a study conducted by Carmen Reinhardt and Kenneth Rogoff for their book This Time It’s Different.
First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.
Coding errors? Academic papers? Who cares? What is going on here? Well Mike Konczal argues that the Reinhart and Rogoff 90 per cent debt cut-off result is the intellectual basis for so-called austerity programs.
… all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.
Here is Paul Krugman making a similar point:
The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policy makers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear.
The other paper, which has had immense influence — largely because in the VSP world it is taken to have established a definitive result — was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone “knew” that terrible things happen when debt passes 90 percent of GDP.
So when all the dust and feathers have settled what will we have decided? The Reinhart and Rogoff result is fragile and they’ll be somewhat embarrassed. Anything else? That I’m not so sure about. As Tyler Cowen indicates:
The “case for austerity” didn’t rest much on R&R in the first place, rather on the notion that the bills have to be paid …
The most interesting question to me is a rather squirrelly and subjective one: how should this episode change the relative ratios of what I read? Should I in fact read fewer quantitative economics papers, instead (at the margin, of course) preferring more narrative history? This is not the first time that an extremely influential major empirical result has been overturned or at least thrown into serious doubt.
The search for a “magic number” is likely to cause disappointment – we can still believe that excessive public debt is detrimental to economic prosperity even if there is no iron-clad rule of when the benefits to public debt are exhausted. Having a “magic number” is far too deterministic to be good economic policy.
Update: The Atlantic has a nice summary here.