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.

A group of researchers at the University of Massachusetts, Amherst have dug deep and found a serious problem – actually a few serious problems with the data analysis Reinhart and Rogoff undertook.

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 Reinhart and Rogoff have responded to these allegations and Krugman responds to the response here.

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.

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17 Responses to AusterityGate

  1. Bruce

    I’ve said before debt is really really good until you cross an invisible line upon which it is like swimming in sodium cyanide.

    Erring on the low side would therefore be indicated, as quite a few Greeks and Portuguese could probably tell you. The austerity monster only came for these countries after they crossed the line.

    I would be cautious to criticise R&R though, since the predictive efforts of people like Prof Krugman, Treasury, Wayne Swan and the like have not been good. Here’s one from today:

    The Most Disturbing Chart From Today’s IMF Outlook Revision

    If the IMF has to keep moving the goalposts like this you have to wonder if they have the right assumptions in their models. Rather like the IPCC ensemble climate modellers.

  2. stackja

    “magic number” sounds like lotto!
    So some economics is a numbers game?

  3. Empire Strikes Back

    Whoopy do. Kool-Aid for the macro crowd. So what? Debt financed recurrent government spending is immoral, whatever the resulting debt to GDP ratio.

    It is inequitable to burden the children of today with a debt for which they will receive no benefit tomorrow. Nothing has changed.

  4. Steve X

    The paper pushed the line to 120%.

    This has been used in the US quite a bit due to the debt ceiling discussion.

    The scary thing is that a large chunk of the left blogosphere is now crying *debt does not matter*.

  5. Bruce

    Spain’s government debt of 60% of GDP was quite fine until the markets sent interest rates ‘way high because of the cajas and the housing crash.

    The problem with debt at 90% or 120% is if the ones with the money stop lending to you or demand a much higher rate of interest. Then you’re a goner. The line doesn’t stay static it moves.

    (Please do not giggle about the link, a broken clock etc etc).

  6. Jim Rose

    replication is not valued much in economics.

    so much so that many are rather sloppy in filing their data in case some asks for it. more people are put the data on their webpages.

    who has ever made a career out of replicating results in economics. the reward are for testing with different and new data.

  7. wreckage

    The problem with debt was never that it somehow magically stifles growth.

    The problem is that the cost of finance is a completely optional expense and only an irrational or stupid government would willingly put itself in a position where it had to pay it.

  8. Mother Hubbard's Dog

    replication is not valued much in economics.

    Sounds just like climate science.

    All academic work would be much improved if (1) reproducing results was routinely farmed out to graduate students and (2) less opprobrium was attached to being wrong.

    Of course, no results should be used for policy decisions until independently corroborated. Preferably both by multiple reproduction of the original results and corroboration by an independent methodology.

  9. sdfc


    Spain’s biggest problem was its private sector had run up debts approaching 300% of GDP when the crisis hit.

    The Spanish government had been reducing its debt levels for a number of years prior to 2008.

    Replication of the past is useless in analysing outlier events.

  10. Bruce

    sdfc – Yes, I said that. The govt debt to GDP only leapt from 60 to 80% initially as Dr Quiggin says. But then the markets decided that 2% didn’t reflect the real risk of government bonds especially when the Spanish govt had to bail out the cajas (private savings banks). They couldn’t service the resulting debt above 6% rate, and it was going to 7 and 8%. That was when the ECB started LTRO and Draghi said ‘whatever it takes’. The market got bluffed and rates are serviceable again.

    Until the line gets crossed next time. Debt is a confidence game. If your bank manager decides in his head you are no good then it doesn’t matter what the reality is.

  11. sdfc

    It makes it harder when you outsource your currency Bruce. 10-year currently sitting at 4.66%. The euro is stuffed.

  12. Peter Sommerville

    All this tells me is that economics is not a science – it is still in the realm of witchcraft.

  13. .


    More like chemistry around 1800-1900.

    Dumb people get burnt (1980s Argentina), the truly stupid and superstitious later on (1900) continue to get burnt (US, Europe).

  14. .


    1800 is to 1980 as 1900 is to 2008-2013 in that example.

  15. tbh

    None of the above means that governments (or households for that matter) can keep adding debt forever. There is eventually a day of reckoning and if you don’t get your financial house in order, then bond vigilantes and the rest of the market will force you to. There is just no escaping that. Eventually people will stop lending you money or make you pay a very hefty price for doing so.

  16. Pedro

    As usual the arguments are not about the core facts. Some countries need austerity because that is all they can afford. The argument against austerity is usually the argument for fiscal stimulus and that argument is in denial about the multiplier being zero.

  17. Gowest

    Growth is needed to manage debt, that is the main reason countries cant afford green wish lists.

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