Photographer: Rick Friedman/Bloomberg

Reinhart-Rogoff Uproar Settles Nothing

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(Corrects book title in first paragraph.)

May 2 (Bloomberg) -- By now, you’re probably tired of all the back-and-forth on Reinhart and Rogoff. That would be Harvard University’s Carmen Reinhart and Kenneth Rogoff, the economists who co-authored the 2009 best-seller, “This Time Is Different: Eight Centuries of Financial Folly,” and who are now on the firing line because of minor data errors in a 2010 working paper.

That paper, “Growth in a Time of Debt,” found that high public debt was associated with slower growth. Specifically, when a nation’s gross public debt exceeds 90 percent of economic output, the median growth rate falls by 1 percentage point, and average growth drops considerably more. The U.S. crossed that debt threshold in 2010.

Last month, three University of Massachusetts at Amherst researchers accused Reinhart and Rogoff of a “series of data errors and unsupportable statistical techniques.” In an April 17 response, Reinhart and Rogoff acknowledged the spreadsheet data error, which didn’t alter the conclusions to a significant degree, and disputed allegations of “selective omissions” in their work. The challenge set off a political firestorm, with critics blaming the two for everything from creating mass unemployment to maliciously influencing Europe’s policy debate to producing global warming. (OK, I made up the last one.)

A few brief points before I get to my analysis.

First, Reinhart and Rogoff didn’t imply causality between debt and growth. In fact, they claim that it goes both ways, with slow growth leading to an increase in public debt, and high debt in turn impairing economic expansion.

Dueling Ideas

Second, the idea that European budget policies relied on Reinhart and Rogoff’s 2010 findings is nonsense. The 1992 Maastricht Treaty outlined four criteria for joining the European monetary union, including specific thresholds for debt (60 percent) and deficits (3 percent) as a share of gross domestic product. The International Monetary Fund often makes its loans conditional on achieving fiscal targets.

Third, claims that the data errors exposed a serious flaw in the research are preposterous. The paper by UMass’s Thomas Herndon, Michael Ash and Robert Pollin does more to confirm Reinhart and Rogoff’s findings on the relationship between high debt and slow growth than to upend it. In a subsequent 2012 paper, Reinhart and Rogoff found that the average growth rate during sustained high-debt periods was 2.3 percent -- the UMass study’s average was 2.2 percent -- compared with 3.5 percent otherwise.

More than enough mathematicians, er, economists, have weighed in on the numbers already. I’ll stick to principles. Call it “Reinhart and Rogoff for Dummies.” Here goes:

As the Reinhart and Rogoff kerfuffle unfolded, I kept thinking of the 2009 rap video, “Fear the Boom and the Bust,” written and produced by economist Russ Roberts and media executive John Papola, co-founders of Here are the opening lyrics, sung by actors portraying John Maynard Keynes and Friedrich Hayek:

“We’ve been going back and forth for a century.”

“I want to steer markets.” (Keynes)

“I want them set free.” (Hayek)

The current debate is nothing more than a revival of that age-old argument between two schools of economic thought: one, free market; the other, government interventionist. It won’t be settled anytime soon.

That hasn’t prevented economist Paul Krugman from taking his victory laps, claiming that Keynesians have won and “austerians” -- his term for those who advocate reducing deficits -- have lost. This is a political, not an economic, conclusion.

Empty Calories

Forget the data for a minute. Imagine asking the average person on the street, Is too much debt a problem? Do you think you would get any negative responses? That’s the essence of Reinhart and Rogoff’s research. You don’t need a doctorate in economics to understand that you can’t spend beyond your means forever, or that piling on debt because it’s cheap to borrow isn’t sound policy.

As for the Keynesians being right, the $830 billion 2009 fiscal stimulus demonstrates just the opposite. One dollar in federal outlays produced $1 of GDP, according to the Congressional Budget Office. There were no second-round effects. The multiplier was one.

Even the notion of government spending as stimulus challenges logic. If the federal government takes a dollar from X, via borrowing or taxes, and gives it to Y, that spending may add to GDP in the short run, but there is no long-run effect. Fiscal policy gets its bang from monetary policy: from the central bank’s expansion of the money supply. Without that, it’s just a transfer of resources.

My analysis finds an important omission in Reinhart and Rogoff’s work, not to mention that of their critics. Not all debt is created equal. Some of it, to fund scientific or technology research and development, will pay a dividend down the road. It isn’t the same as incurring debt to subsidize a tattoo-removal program, Moroccan pottery classes or Smokey-the-Bear balloons.

One final point, and something that plagues the economic profession in general: physics envy. It’s the desire by the social sciences to know something with certainty in a field where complex phenomena and human behavior often can’t be quantified.

It’s irrelevant, to me at least, whether the exact debt-to-GDP threshold where economic growth suffers is 90 percent, 88.3 percent or 95.5 percent. The point is, too much debt is bad. Anyone who doubts that is welcome to test the theory.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)

To contact the writer of this article: Caroline Baum in New York at

To contact the editor responsible for this article: James Greiff at