With all the heated discussions of the last two weeks, it is important to keep perspective on which issues are in dispute and which are not. Let me state plainly something on which I think we ought to be agreed: Carmen Reinhart and Ken Rogoff’s 2009 book, This Time Is Different: Eight Centuries of Financial Folly, is a valuable work of scholarship that continues to deserve study and praise from any thinking person. Here I review some of my reasons for saying that.
Let me begin by taking us back to early in 2009 when the U.S. economy was plunging deeper into an unusually severe recession. One of the key questions people were asking at the time was, what would the subsequent recovery look like? If you looked just at the U.S. postwar record, you would notice that in recent U.S. history, deep recessions tended to be followed by dramatic recoveries. Here for example is part of a discussion by Professor James Morley published in Macroeconomic Advisers’ Macro Focus on April 27, 2009:
There is a strong historical “snap back” relationship between the strength of economic
recovery and the severity of the preceding recession. Thus, recessions and their recoveries
have a tendency to trace out a “V” shape. Because the current recession that began at the
end of 2007 started out shallow and only recently became deep, a simple time series model
of the “snap-back” dynamic implies that the current recession may have a lower-case “v”
shape, although the fact that the economy is likely to continue to contract further before a
recovery takes hold argues for the possibility of an upper-case “V”.
However (and as the above article also discussed), when one broadens the historical reference set, as Reinhart and Rogoff suggested we should, from 60 years of U.S. data to many hundreds of years of experience of dozens of countries, the outlook for the United States in early 2009 was much less sanguine. Here is what Reinhart and Rogoff wrote in an article that appeared in the Wall Street Journal on February 3, 2009 entitled Expect a Prolonged Slump:
when one compares the U.S. crisis to serious financial crises in developed countries (e.g., Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992), or even to banking crises in major emerging-market economies, the parallels are nothing short of stunning….
Over past crises, the duration of the period of rising unemployment averaged nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.
We now all know how events turned out. The U.S. unemployment rate, which had risen from 4.7% in November 2007 to 7.3% by December 2008, would go on to climb to 10% in October 2009. Even today– 5 years later– the unemployment rate remains at 7.6%, far above its historical average, and above the most recent value reported at the time Reinhart and Rogoff issued their warning.
Here is what Paul Krugman wrote in July 2010, in an article in which he expressed his differences of opinion but began by acknowledging some of the areas in which Reinhart and Rogoff’s research had proved crucial for understanding what had happened to the United States:
Regular readers will know that I’m a huge admirer of Ken’s work, both theoretical and empirical. Obstfeld and Rogoff is the definitive work on New Keynesian open-economy macro; Reinhart and Rogoff the definitive empirical history of financial crises and their aftermath. It was largely thanks to my study of Obstfeld-Rogoff that I realized, from the get-go, that many of the arguments we were hearing about how modern macro had proved Keynesianism wrong were just ignorant; it was largely thanks to my reading of Reinhart-Rogoff that I realized, early in the game, that this was going to be a prolonged slump rather than a V-shaped recovery.
But on other issues, Krugman and others have been slower to be persuaded. Even after publication of their book in 2009, many still seemed susceptible to the latest version of the “this-time-is-different” syndrome, insisting that modern governments would be immune to the kinds of fiscal crises that Reinhart and Rogoff documented had been repeated again and again throughout history. For example, on November 22, 2009 Paul Krugman wrote:
Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.
Again, we now know what happened next. Krugman’s “bond vigilantes” have so far left Belgium and the United States alone, but the yield on 10-year sovereign debt of Italy, Spain, and Portugal (which had all been below 4% at the time Krugman dismissed concerns about Italy), along with Ireland and Greece (below 5% at the time), subsequently spiked up to much higher levels, a development that brought significant hardships for the people in those countries, and whose final ramifications are yet to play out.
Reinhart and Rogoff (2009) summarized their core message on page 292:
All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.
This time may seem different, but all too often a deeper look shows it is not.
Is this a lesson that any of the statements zapping across the internet over the last two weeks do anything to undermine or dismiss? You could only imagine that the answer might be yes if you’ve just been following the controversy at the level of headlines and soundbites and ignoring analyses of the substance of the controversy. If that’s the case, please get yourself informed by reading this and this. To briefly summarize the facts that you’ll find developed more fully there, some researchers at the University of Massachusetts have challenged one tiny detail of one follow-up study by Reinhart and Rogoff having to do with an issue that I have yet to even mention so far in today’s discussion. That dispute concerns a measure of the correlation between sovereign debt levels and GDP growth. I say it is a tiny detail, because the dispute is completely restricted to just one of six different summaries of three different data sets in that one particular paper. The Massachusetts researchers correctly noted that there is an error in the spreadsheet which, if corrected, would have changed the number Reinhart and Rogoff should have reported for that one statistic by a few tenths of a percent. Bigger changes in that one statistic could be obtained if one adds some additional data and makes what I regard as a questionable change in methodology, but even with all the changes they want to make, the results preferred by the University of Massachusetts researchers are in fact very similar to the other 5 dataset summaries that will be found in Reinhart and Rogoff’s original paper, as well as a subsequent analysis of expanded data that Reinhart and Rogoff published in 2012 (which again the Massachusetts scholars did not mention or discuss).
So how does any of that cause us to discount or dismiss the contributions of This Time Is Different? You tell me.
Professor,
You should not use Krugman as your example. As you show in 2010 he totally revised what he had been saying earlier. Krugman is a man that can always predict the past a few years after it happens.
I like this take on RR:
http://www.ritholtz.com/blog/2013/04/missing-the-bigger-picture-in-the-reinhart-rogoff-debate/
He argues that the RR dispute is missing the main problem of the current recession. It’s not government debt or austerity or spending/stimulus. It’s an out of control, oversized financial industry. And until you fix that problem, nothing else will work.
It’s a good post and worth reading.
With regards to Belgium and Italy (as well as Spain, Portugal, Ireland and Greece), one needs to consider the role of the Euro and whether the indebted nation has control of its own currency. Say what you will about Italy’s yields rising, but Japan still have rock bottom rates in spite of carrying significantly more sovereign debt. The U.S. is more similar to Japan than to Italy.
The only thing wrong with this is it still assumes debt is the cause rather than the result, and that the source is debt rather than austerity or deficient monetary policy. There is much to be learned from history, but it is important to learn the right lessons.
Why this need to carry R&R’s water? Even Krugman, who seems to have become the sort of bogeyman for you that he is for others, has recently praised both this book and the 2012 R&R paper. And during the 2009 period, your new obsession Krugman was also citing R&R in the same way, to argue that recovery would be long.
Misstatements and mischaracterizations are common. I was at the gym last week and the close-captioned show said something like “Paul Krugman and others like him believe deficits don’t matter.” That’s nonsense. He doesn’t believe that. Others seem to be saying R&R believe we must cut the deficit now. That’s also nonsense. And every study of this sort of thing says that partisans not only don’t listen but don’t process contrary information while being more receptive to information that fits their arguments.
I said “carry the water”. That 1 panel was the one in which we live, the advanced economies. The work, IMHO, was fine. I don’t care about a spreadsheet error – though they should have made that work available it’s not clear to me anyone would have bothered to actually check the work. I do care about omitting data, including it in another paper and not saying squat, not even a website post noting a change. Does it matter? Yes. Because works are cited over and over and over and some works are cited more than others. This paper was important. That imposes obligations. People will find it in 40 years and will bring it up to make an argument. It will then be necessary for someone else to find the paper outlining issues with it and then for others to find papers arguing about all of that when the correct scientific procedure would have been for the original authors to note a correction. And people will wonder again why we can’t get anywhere.
My feeling is pretty simple: that angry response in the NYT would have been 1000 times better if they’d simply said, “We should have noted on our website that data used in the 2010 paper was changed and the effect that had on our 2010 results.” That’s all. Just admit it.
As for about 90% of your post – about an issue in which you are now as personally involved as Menzie Chin is with Scott Walker – no one disagrees. No one says that debt doesn’t matter. Remember, the point for which R&R was used – and misused – was a cliff at 90% which appeared to cause a dead halt in growth. That can be used as a club to force political changes that affect human lives. To say there is a 1% or so decrease in growth that’s still positive changes the political argument. That is the importance of being forthright about a paper that has so much political importance.
BTW, when you trot out crap like Krugman’s mention of Italy, you show you are personally involved because you know he would just say “The ECB wasn’t standing behind Italy. Look at the rates now.” You have a paper, which I found interesting, which presents an argument – it isn’t “evidence” as you’ve said but an “argument” – that maybe yields could go nuts. It has been criticized for taking Eurozone countries and applying them inappropriately. Maybe. But it shows what could happen, which I took as being the point. But when you toss out a reference made to Italy before the ECB changed its stance to become more of a real bank of last resort, you throw up a softball. Remember, in that 2009 link – to a freaking blog post – Japan is at the top of the debt list. So Krugman was wrong about something. Whoopee!
Good grief. The mental gymnastics some are willing to perform in service of their heroes is breathtaking.
Bravo. I understand Cirque du Soleil is hiring in Vegas.
Carmen Reinhart and Ken Rogoff’s 2009 book, This Time Is Different: Eight Centuries of Financial Folly, is a valuable work of scholarship that continues to deserve study
Indeed. And as Krugman said just the other day, the sterling reputation of that book is one of the things that gave a lot of unwarranted credence to R-R’s less than sterling papers on the 90% threshold.
I don’t think anyone ever said that deficits and debt levels don’t matter. One of the questions was always whether or not the 90% “threshold” mattered in the sense that it was a bright line that applied universally for all countries at all times. That’s the strong interpretation that R-R allowed to float through the ether despite numerous opportunities to correct the record. So R-R were either guilty of bad economics or failing in their duty as public intellectuals. Take your pick.
The second problem is that some politicians drew conclusions that did not follow from the strict arguments in R-R’s papers. Even if you grant for the sake of argument the strong interpretation of 90% being a bright line threshold leading to weaker economic growth, it does not necessarily follow that austerity policies going forward will prevent lower economic growth. We entered the Great Recession most of the way towards that 90% threshold. That was water under the bridge. Okay, so we made some really bad decisions during the Reagan/Bush41/Bush43 eras. Does that mean fiscal austerity is the right policy given the position we found ourselves in post-Great Recession? The lesson from R-R’s book (as opposed to their papers) was that post-financial recession we were going to run up lots of debt for a long time. That was just baked into the cake. And debts accumulated prior to 2008 were also baked into the cake. In a sense every dollar of accumulated debt is fungible. The debt we accumulated during the fat years counts just as much towards the 90% threshold as the debt we accumulated after 2008. The difference is that the latter debt represented the least bad choice from a menu of bad choices, while in the former case the debt we accumulated under Reagan/Bush41/Bush43 represented the worst choice from a menu of good choices. R-R inserted themselves into the role of public intellectual, which means they had an obligation to point out that idiots in Congress, idiots at the WSJ, and idiot VSPs were learning the wrong lessons from their paper. Instead R-R chose to hide behind footnotes in inaccessible academic papers behind paywalls.
Every day that interest rates fail to rise, Dr. Hamilton cries a little bit. And if that debt/gdp ratio keeps rising, his cholesterol rises in step.
Poor, poor man.
Prof. Hamilton,
I’d say, as an amateur, that the answer to your question is that R&R don’t recognize the distinction between governments that are sovereign, monopoly issuers of their own currency in which they contract obligations and states, such as Italy or California, that do not use their own currency and that contract obligations in the (foreign) currency they do use.
The former group, such as the US, the UK, Japan, can always meet any obligation that they have contracted in their own currency.
As for Ricardo’s comment about Prof. Krugman, I’d say that it is a virtue for a scholar (or anyone else) to change his or her views in the face of new evidence or better thinking.
Jonathan and 2slugbaits in particular express the points with the clarity that I lack.
Couple other points.
In his article, ‘Austerity and Debt Realism’ of 1 June 2012 in Project Syndicate, Professor Rogoff had stated, “In a series of academic papers with Carmen Reinhart – including, most recently, joint work with Vincent Reinhart (“Debt Overhangs: Past and Present”) – we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more. The cumulative costs can be stunning…”
Furthermore, he stated, “Of course, there is two-way feedback between debt and growth, but normal recessions last only a year and cannot explain a two-decade period of malaise. The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending. So, yes, government spending provides a short-term boost, but there is a trade-off with long-run secular decline…”
The thing is, the two-way feedback part of the statement seemed to not have featured as caveat in the public appearances, media or congressional, of either himself or Professor Reinhart. Instead emphasis was on the 90%, called the Law of Finance by Niall Ferguson. This omission then may have been another cause of such unease.
Finally, given the prestigious positions and accomplishments of both professors, which few would deny, one would have expected a more rigorous and professional approach to data handling, ‘cross-checking’, and timely sharing.
Krugman’s question is about the conclusion that a certain threshold of debt to GDP represents a danger zone.
In the case of Spain, debt certainly did not trigger the runup in interest rates – Spain’s debt to GDP had been shrinking, steadily down from about 67% of GDP in 1996 to 36% of GDP in 2008, before the euro crisis began. Germany’s debt to GDP in 2008 was nearly DOUBLE Spain’s, and is currently approximately equal to Spain’s. So is Germany in the same boat as Spain because if its debt to GDP ratio?
If not, new theory time.
Any defense of R-R that addresses current critics while ignoring R-R’s efforts to imply a tipping point at 90% is a red herring. It’s difficult to locate the addressee of this post, since the conversation doesn’t seem focused on attacking This Time Is Different, or that a relationship exists between debt and GDP. To operate under such a misunderstanding, a person would have to ignore all references to causality.
As others have noted, you are simply not addressng the main issue here, which isn’t the quality of This Time is Different?,but rather R-R’s actual, repeated promotion of the notion of a 90% debt/GDP threshold, for which they (at the most charitable) had inadequate evidence.
The Excel error is a somewhat unfair hook for the media coverage of the story, but it isn’t as if they don’t deserve the criticism they have received.
@Charlie,
Great point comparing Spain to Germany!
Actually, I think Krugman vastly overrates “This Time Is Different”. For one, it is an atrocious read, and very repetitive. Second, the central exercise of the book — reporting the average impact of financial crises on different economic measures, is interesting but not of that much value in the end, since an arbitrary cutoff had to be made about which financial crises to include in the averages and which to exclude. Third, the insight that severe financial crises are usually followed by slow recoveries is not new or path-breaking, and nothing else they say in the book is either. More troubling is that R&R’s policy advice based on this trenchant observation was not that governments needed large fiscal and monetary stimulus — instead they included warnings about government indebtedness.
On top of all this, the book is filled to the brim with suspicious-looking data and outright howlers — for example R&R blame countries leaving the gold standard for causing the decline in trade during the Great Depression, which could not be further from the truth.
I think the real problem is the focus on and overemphasis of the 90% threshold. R&R divided countries into debt-GDP buckets of 0-30, 30-60, 60-90, and 90+ percent. There may be a big difference in performance between countries with 91% and 151% ratios, but in the R&R calculations, those two country/year observations would be lumped together. In short, 90% is not some magic point they estimated from the data.
It seems to me to be reaching to argue that R&R had anything important to say during the early 2009 debates.
Most thoughtful people understood that in the absence of getting sizable amounts of cash (via government investment or direct payments) into consumer hands we were headed for an L-shaped recovery.
Most people understood that with corporations stuffed with cash, with residential construction unlikely to be a player until the overbuilding was worked off, and with large numbers of unemployed and of consumers worried about their futures, the central bank’s hands were tied. There simply was no mechanism available to transmit monetary policy; that is, low interest rates on money no one wants doesn’t do much for the economy.
IIRC Krugman early on recognized that all the central bank could do was wave its hands and call for inflation — something it was (and still is) loathe to do.
How did R&R add to the debate?
It seems everyone else has said what I was going to say, but I’ll say it anyway, because it is frustrating to read a post that seems so stubbornly to miss the point: the way politicians and R&R themselves clearly and repeatedly used the paper was to argue that a debt/gdp ratio of 90% was a “threshold” beyond which growth would likely slow or stop over the long term. This conclusion looks highly dubious, and when you cite cherrypicked examples of Italy and Belgium you do not do yourself any favors. Also, the extreme emphasis on Krugman is weird too.
Brian Yes, I agree. I’m a firm believer in always checking the footnotes because that’s where you’ll find all the bodies. In this case it turns out that R-R claim that their four bucket categories were mainly based on convenient categories used in other studies. Specifically, they point to the World Bank’s use of those four buckets. And here’s the killer quote from a footnote in their 7 January 2010 draft:
Sensitivity analysis involving a different set of debt cutoffs merits exploration as do country-specific debt thresholds along the broad lines discussed in Reinhart, Rogoff and Savastano (2003)
Game. Set. Match.
Um.
In examining whether recoveries are V-shaped or not, did anyone think to look at the degree to which *fiscal* policy was employed? It is obtuse to look at hundreds of years worth of growth data without considering that the government action response to recessions prior to the New Deal was austerity, and that government response post-Carter has been, increasingly, austerity.
Also, and this is a point Krugman has raised, has anyone bothered to look at the role of *private* debt on debt crises? That’s what ultimately keeps consumers from buying and companies from investing. Public debt is relevant only to the degree that it crowds out private borrowing, thereby requiring either higher taxes, inflation, or austerity. What we have seen in the latest recession is that public debt is being driven mostly by unemployment, which is why the deficit has come down so dramatically as unemployment has fallen.
And that’s why looking at fiscal policy is so obviously important to understand recoveries.
‘When the fly’s legs are strapped, the fly does not hear since it is was flying on voice command when its legs were free’
Great rigour in the world of the economists for today, when This time was different, the Public debts of many Western countries were below the threshold of 90% to GDP as of today most of them exceed 100%. Those past and present policies makers have the freedom of proving themselves right and R&R wrong,without being embarrassed by correlations are not causations,the story is ongoing. Empirical observations will be enriched later.
There is really no denying that this paper has been discredited. There are too many mistakes, sloppy statistics, and unfounded and too strong strong suggestions. Indeed, they have done very good work, including their book. But this is precisely why I have said from the start that R&R should denounce this one paper as a bad apple, so that it does further taint their reputation and that of their other work. Unfortunately that is not what they did, in fact they further dug in their heels, as they did in their NYT non-apologies. So it’s not just their critics that would taint their other, good, work, it’s R&R themselves, by not separating the two and showing they’re human and can make mistakes. And that is very unfortunate.
This post is just digging a deeper hole. RR’s work does nothing to support the view that fiscal policy can not be used to restore demand in a depression. Nothing. The fact that a serious economist like Prof. Hamilton doesn’t seem to realize that is just one more illustration of what an intellectual wasteland the economics profession has become. If the profession had allowed a real debate over this issue, instead of opening up the pages of its flagship journal (JEP) to only one side of the debate, perhaps we’d be in better shape?
Mr. Hamilton,
Really, The data is the data, R/R was flawed, plain and simple, Spin it all you want, but at the end of the day its garbage in and garbage out. I would expect someone of your status to argue from facts and data ,not your own bias, however that is not the case with you anymore. Somewhere along the line you sold your soul. And BTW Italy 10 yrs treasury is 4% as of today.
Prof. Hamilton,
I agree with you that we should not dismiss “This Time is Different”. BUT let’s be intellectually honest and state that while high government debt leads to slower growth, there is nothing that says debt levels above 90% of GDP lead to cataclysm.
Please provide evidence that a Keynesian fiscal expansion NOW would not increase GDP and would not lead to a lower Debt/GDP level.
‘…there is nothing that says debt levels above 90% of GDP lead to cataclysm.’
Who ever said it did?
A number of commenters have suggested that JDH is somehow obsessed with Krugman in bringing him up in this post. I don’t think JDH is off base at all to point out that Krugman has been wrong on some key points related to this debate, especially given Krugman’s ring-leader role in HAP’s attempted character assassination of R&R.
Krugman got the ball rolling with “The Excel Depression.”
http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.html?_r=0
Krugman, in typical fashion, sets the stage by reminding readers that a spaceship crashed and the London Whale lost billions because of simple mathematical errors, just so that readers will understand the magnitude of the offense that Krugman is about to reveal.
Krugman then claims, without any citations or proof, that other researchers had tried to replicate R&R’s research and could only get a correlation.
Krugman then says
“Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”
The way Krugman puts it, saying “Finally .. allowed,” is vintage Krugman, implying that R&R are stonewalling on showing their data, which omits the fact that R&R have been completely open about their data and share it with other researchers. In fact, the article is vintage Krugman: insinuation, assertions without citations, and outsourcing of the main analysis.
Krugman then acknowledges that R&R never really said that debt necessarily caused slow growth, but holds them responsible nonetheless:
“..and claimed that they never asserted that debt necessarily causes slow growth. That’s a bit disingenuous because they repeatedly insinuated that proposition even if they avoided saying it outright. But, in any case, what really matters isn’t what they meant to say, it’s how their work was read: Austerity enthusiasts trumpeted that supposed 90 percent tipping point as a proven fact and a reason to slash government spending even in the face of mass unemployment.”
So R&R are guilty because of how others have interpreted their work. Well Henry Blodget interpreted Krugman’s work all right, writing in “The Argument Is Over: Paul Krugman Has Won.”
http://www.businessinsider.com/paul-krugman-is-right-2013-4
“An academic paper that found that a ratio of 90%-debt-to-GDP was a threshold above which countries experienced slow or no economic growth was found to contain an arithmetic calculation error.
Once the error was corrected, the “90% debt-to-GDP threshold” instantly disappeared.”
And thus the mythology was born that a simple insignificant error invalidated an influential and important body of work.
Krugman followed up with “Further Further Thoughts on Death By Excel” here:
http://krugman.blogs.nytimes.com/2013/04/17/further-further-thoughts-on-death-by-excel/
There he points to an OECD paper
http://www.oecd-ilibrary.org/docserver/download/5k918xk8d4zn.pdf?expires=1367246350&id=id&accname=guest&checksum=9A9778958C5F0B1B0CD0969DE68BD333
and reproduces a chart from the paper that purports to show that R&R have not been supported by other research findings.
But here’s what I find amazing about Krugman and his zombies. He’s so confident that none of them will check him that he brazenly posts a paper that directly contradicts what he’s been saying. Remember, he’s just been telling his readers that other researchers had not been able to confirm the R&R results and that we didn’t understand why until HAP pried the data from R&R’s unwilling fingers.
Here is a quote from the introduction of the OECD paper:
“Many recent empirical papers sought to pin down and explain the possibly nonlinear negative
relationship between public debt and growth. Most of these papers broadly confirm that the turning point beyond which economic growth slows down sharply is around 90% of GDP. Cecchetti et al. (2011) find a threshold of 86% of GDP for a panel of 18 OECD countries and for the period from 1980 to 2010. Padoan et al. (2012) report similar effects for a similar group of countries but a longer period (1960 to 2010). Covering a mix of advanced and emerging market economies, Kumar and Woo (2010) finds a turning point at 90% of GDP. Checherita and Rother (2010) and Baum et al. (2012) report similar results for a set of euro area countries. But Caner et al. (2010) and Elmeskov and Sutherland (2012) show that the
tipping point is probably lower: 77% for a set of 77 countries, and 66% for a dozen of OECD countries, respectively. Finally, in a recent contribution, Panizza and Presbitero (2012) argue that a negative correlation between debt and growth does not imply causality, as lower growth can result in a higher public debt to GDP ratio.”
Contrary to Krugman’s assertion, the point of the OECD paper is not to debunk R&R but rather to attempt to estimate the non-linear threshold endogenously, which the author finds to begin to bind at much lower values than the 90% that R&R proposed as a marker for a high debt regime.
To JDH’s point, just a glance at the introduction to the paper that Krugman referred to shows that R&R have inspired an avalanche of new and important work on debt dynamics. And that’s just a part of the important research program they have inaugurated on financial crises. I personally don’t agree with some of the implications of it, particularly on how long recessions following financial crises should be expected to last. But I acknowledge the importance, influence, and seminal contributions of R&R’s research.
You Krugman zombies need to start thinking for yourselves. At the very least, check out the facts before repeating the canard that R&R have been proved wrong or before talking about the 90% threshold again and again. JDH has explained both points to you clearly and has provided real evidence. Krugman, in contrast, thinks so little of you that he believes he can post a paper that directly contradicts him and you won’t even notice.
Here is the bottom line: had any accountant made similar mistake they would have been fired, and the PCAOB would be circling for blood. My primary read of the work in questions is that it confuses correlation with causation, omits so many variables as to make one question how rigorous the economics profession is in general. Even the analysis here cites instances of bond spikes without asking if they would have happened had the countries in quesiton had their own currency.
In the past hear I have seen an analysis of oil and gdp – which did not include the R squared – which was in fact quite low and an analysis of miles driven that did not look into the impact of changing demographics.
The overall impression frankly of a professions that uses data as justification for whatever preconceived notions the analyst might have.
The work was sloppy – and that it took this long to be caught stunning.
As most every other comment has implied, this is not your finest hour. First, in the other posts, your arguments were almost nothing but misdirection. Now you’re again pitting yourself against (probably imaginary) people who want to throw the “baby out with the bathwater”?
I mean, of course, I cannot disagree that anyone who says that this one episode means that everything R-R have ever said are lies and falsehoods is probably wrong. One more point for you! Not sure who is the opponent in this game, but I guess you do?
Why you are risking your reputational capital on this 1945 Dresden situation (trying to pick out survivors when the bombs are still dropping) is beyond me, but again, I guess you have your reasons. I fear you are going to end up in the same situation as R-R, but I guess you will have stayed true to your principle?
What is that principle again? That neither facts nor errors nor misleading arguments nor illogic are important as long as all analyses ultimately fit your preconceived notions?
If you really don’t have any idea why the comment section looks like this, if you really feel this is some sort of over-reaction or “liberal rage” or “liberal conspiracy”, I fear you are too lost to ever assess reality in almost any reasonable manner.
[And the Krugman stuff is preposterous. No matter how many mistakes the KrugTron has made, it does not excuse the mistakes of R-R. You are welcome to think their mistakes (e.g., failing to correct obvious, highly visible misinterpretations of their paper) do not deserve this level of opprobrium. Most of us disagree and are not persuaded by your arguments.]
R&R apologists, it is entirely disingenuous to look strictly at their discredited paper and ignore their public statements about their paper:
Rich Stryker: To JDH’s point, just a glance at the introduction to the paper that Krugman referred to shows that R&R have inspired an avalanche of new and important work on debt dynamics.
This might be true. And for me as well, the insight from historical studies that recoveries from financial crises is typically prolonged was useful. But interestingly, the idea that RR’s research though probably flawed yet pioneering has provoked comparisons in style and content with controversial research in other fields hotly disputed by those on the other side of the political spectrum. As others have stated before, RR allowed the idea of a debt cliff to persist without correction in policy circles.
All: Many of you suggest that I have missed “the” point. Let me begin by suggesting that you have missed my point.
My purpose was to clarify that This Time Is Different: Eight Centuries of Financial Folly is a valuable work of scholarship that continues to deserve study and praise from any thinking person, and that none of the controversy over the last few weeks should lead one to discount or dismiss its contributions. Secondly, I wanted to emphasize again that none of the recent controversy in any way undermines Reinhart and Rogoff’s conclusion that higher debt levels are correlated with slower economic growth.
Those may not be your points, but they most certainly were mine.
If it is indeed the case that all reasonable people already endorse those statements– and I continue to maintain that they should– then tell me something. Why aren’t more people making the statements that I just did? Why aren’t these the opening clarification, not just in HAP’s paper, but in every subsequent discussion of the issue? Why, when I make those two statements clearly, should I myself be subject to such ridiculous personal attacks?
As for who is denying these claims, let me answer that plainly as well. I have had conversations during the last 10 days with three different people– not academic economists, but very intelligent people who follow business and economics news with interest. And each of the three said to me that they had liked the book This Time is Different, but now wondered if it had all been proved wrong. That was why I thought it was important for me to write what I did.
Several of you insinuate darkly on what my real motives might be for throwing my body in front of the flying bullets and dropping bombs. Well, let me clarify that as well, in hopes that you might learn something not just about me, but also about yourself.
Here is my motive. I perceive Reinhart and Rogoff to be two good people and fine scholars who have been subjected to a mob-delivered hatchet job attacking their personal integrity and professional scholarship. When I see a bully, I am willing to stand up to them, even at personal cost to myself.
That is a statement that I know to be true and accurate. And if you find that statement contradicts some element of your broader world view, then let me tell you something about yourself.
There is an objective, factual inaccuracy in your broader world view.
I see the failure of interest rates to rise is also causing some blood pressure issues for Mr. Rick Stryker.
Stryker, we’ve been hammering this piece of junk from R&R for years.
http://www.epi.org/publication/bp271/
Point taken, I guess.
However:
“Here is my motive. I perceive Reinhart and Rogoff to be two good people and fine scholars who have been subjected to a mob-delivered hatchet job attacking their personal integrity and professional scholarship. When I see a bully, I am willing to stand up to them, even at personal cost to myself.”
Absurd. Completely absurd. Two good people and fine scholars who have sat atop their ivory tower frequently and openly asserting in public that 90% is some magic debt/gdp wall that we cannot cross or else the country will implode. No references necessary, there are many in this thread and earlier threads.
The cost of their ignorance is literally trillions in lost output and innumerable jobs for the unemployed. Not to mention our future that we are throwing down the drain by allowing this persistent output gap to sustain itself.
This episode will make economic history books and in 40 years when all of you 1970s inflationist dinosaurs have mercifully passed on, I will be teaching undergraduates about the miserable mistakes made by a group of self-important intellectuals who could not understand the human cost of their (wrong) work.
As a critic of the “debt cliff” idea, this to me represents the useful contribution by RR’s “this time is different” . (And I agree that our host deserves better).
In a post like this, since you go back and forth between the paper and the book, I think it’s worth acknowledging that Reinhart and Rogoff have been misleading. Here’s an example.
See
“Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP.”
http://www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-grow-commentary-by-reinhart-and-rogoff.html
(H/t Brad DeLong)
They temper these statements later, but they have, in the 2nd paragraph, referred to 90 percent as an “important marker” and still claim that their evidence “supports the view . . .”. (Note that an association of lung cancer and smoking does not support the view that lung cancer causes smoking.)
If R & R want to say that this was a mistake, then great.
By the way, I of course don’t fault you for not having heard of this, but please note it in your future discussions and thoughts on this.
“mob-delivered hatchet job”
….seems a bit over the top. If they had been urging caution about the conclusions of their work and emphasizing the caveats I’d have a bit more sympathy for them. But instead they seemed to be cheering on the 90% threshold and implying the casuality as well. Then they issue the grudgingest admission that they might have been the tiniest bit wrong (but not really!).
Is it wrong that public intellectuals who promote the policy implications of their (wrong) work should be held to account?
“even at personal cost to myself.”
Over 30 mostly critical blog posts, some from regulars that admire your work?
“Here is my motive. I perceive Reinhart and Rogoff to be two good people and fine scholars who have been subjected to a mob-delivered hatchet job attacking their personal integrity and professional scholarship. When I see a bully, I am willing to stand up to them, even at personal cost to myself.”
Sorry, I’ve read enough people that are equally critical of R&R, like Simon Johnson, Brad DeLong, Mark Thoma, and Dean Baker (who claims has been asking for the data that R&R used to write their paper since 2010) to think this is simply the work of bullies. Did you even watch the Colbert Report episode? R&R had become the Economist Laureates of the Republican Party.
“Secondly, I wanted to emphasize again that none of the recent controversy in any way undermines Reinhart and Rogoff’s conclusion that higher debt levels are correlated with slower economic growth.
Those may not be your points, but they most certainly were mine.
If it is indeed the case that all reasonable people already endorse those statements– and I continue to maintain that they should– then tell me something. Why aren’t more people making the statements that I just did? Why aren’t these the opening clarification, not just in HAP’s paper, but in every subsequent discussion of the issue?”
Response: Matthew Yglesias responds to this by saying: “The raw fact that there’s a statistical correlation between debt:GDP being high and GDP growth being low is trivial and offers no policy guidance. Countries with a high ratio of sheep to people generally have low populations, but that doesn’t mean that killing sheep leads to population growth. Right?”
http://www.slate.com/blogs/moneybox/2013/04/26/reinhart_rogoff_respond_unpersuasively_to_their_critics.html
From time immemorial, people have “thrown their bodies in front of the flying bullets and dropping bombs” in the name of religion.
And that’s exactly what this is, a religious belief
Professor Hamilton: I could not agree with you more. You perform a very valuable service laying out facts of this controversy, the great economic controversy of our time. Next are extractions from my April newsletter.
Debt was still only 64% when the financial crisis erupted. When the economy plunged, the call for stimulus was overwhelming. With trillion dollar deficits, the debt ratio quickly soared above 90%. As this is the most jobless recovery of the postwar period, and as the output gap is still large, the Keynesian-dominated profession still argues for more deficit stimulus. Keynesians rail against current and future budget cuts. The pejorative term is austerity. They claim there should be no austerity until full employment is reached. The concept of managing the economy for full employment was Heller’s New Economy idea. The bulk of professional macro work the last 50 years was about how to engineer this. The core macro-belief is wrapped in Keynesian short-termism. Academic careers, published papers, Nobel laurels received, all are in jeopardy if the shell gets cracked. RR did just that with their book: “This Time Is Different.” The economy is unfolding just as RR predicted – substandard growth over excruciatingly long periods of time. Keynesians say it’s because there’s not been enough fiscal stimulus.
The economy is now in the high debt region. More stimulus would drive the debt even higher. Unless, that is, the output gap was quickly closed by additional tax revenue and reduced stabilizer spending, the flows needing to be large enough to shrink an even more bloated deficit fast enough to turn the debt ratio down. This is a thorny theoretical and empirical thicket. The RR studies weigh on the side that a turndown would be long in coming. Effectively, the long-run Keynesian fiscal multiplier would have to be large and positive. Even more so with more deficit-created debt pressing down. There is absolutely no consensus in the profession about the numerical value of the multiplier. Most papers don’t even compute a long-run multiplier, only a short-run impact multiplier. Few studies have used the debt ratio as an additional explanatory variable when estimating the multiplier. Remember, Keynesianism is all about the short-run. “Time” was not a part of Keynes’s theory, though he certainly talked about time. But he abstracted from processes involving time as much as he could. Yet the heart of capitalism – productivity-enhancing capital – is wholly time dependent!
Anon2: The difficulty here is that most people have only limited ability to judge such complex matters. Let me offer an analogy. All world champion grandmasters had an inherent ability to see the entire board at a deep level, as well as having seen certain positions arise time and time again. This is how they reached that pinnacle, and how some were able to play two-score games simultaneously while blindfolded and win them all. What Ritholtz proffers is not untrue. To stay with the analogy, it is however merely tactical. To truly comprehend what is going on, all must be placed in historic and strategic context. In chess and in economics. The oversized financial industry is indeed a problem, but much else supersedes it in importance.
Kosta: Rates have little to do with these episodes except at the extremity. The US is not there yet, though Japan now is. Watch what happens within the next 24 months in Japan. In the long-run, the interest burden on their debt may spell apocalypse. Your argument from rates in Japan being low enabling them to carry their massive debt, and extrapolating that same condition to the US, deflects from the point. The point is: RR found that high debt episodes correlate with slow growth. The interest burden is only one of many ways debt might be causal to growth. In my judgment, a more important way is that the higher the debt, the more constricted the ability of an agent to exercise growth options that, as a side product, would bring its debt down.
2slugbaits: I don’t think anyone ever said that deficits and debt levels don’t matter. For 60 years macroeconomists have said just that – debt doesn’t matter.
Leftcoast: The former group, such as the US, the UK, Japan, can always meet any obligation that they have contracted in their own currency. If you look carefully at the trajectory of Japan’s demographics, trade surplus turning to deficit, and downward trajectory of personal saving, in the context of a 240% debt ratio where interest costs already absorb 45% of Japan’s tax revenue, you might temper your view somewhat.
Charlie: Is Germany in the same boat as Spain with its debt ratio? 2012 German gross debt ratio 82%, and flat across 2010-2012. Spain’s 84%, and climbing at the rate of 10 points per year. Besides the trajectory, a key and perhaps the key to answering your question is what did all that debt finance. Was it productive capital or otherwise? A second aspect not independent of the first is: Where are rates divergently going in Germany and Spain when the euro currency splits apart.
Ellen: We are well into an L-shaped recovery. The RR work predicts exactly this. Convention economics did not. Witness the V-shaped forecasts of the OMB, CBO, and Fed sequenced across the past few years. These representative agent forecasters still say good times are coming. In the 20 years prior to the crisis, RGDP grew at a rate of 2.5%. That growth was enhanced by the private sector credit bubble. There are long years of deleveraging ahead. If RR are even half right and growth is diminished just ½ point from what it was in the 60% to 90% debt bucket that prevailed over most of those two decades, growth in this now higher bucket will average only 2% going forward. And for a long time.
Charles II: You raise an excellent point. But consider, how is it ever possible to get into long episodes of 90% debt overhang if government responses prior to the 1930s (in the long RR data series) was austerity? Data here: http://dx.doi.org/10.1257/jep.26.3.69
Rick Stryker: They cannot hear you or Jim Hamilton. Truly they cannot. The why of this is a scientific research project on the order of ferreting out the causality inherent in the RR debt-growth correlation.
RB: You extract a point of vital importance from Rick Stryker’s brilliant exposé of Krugman’s methods. Go back and read Thomas Kuhn’s classic Structure of Scientific Revolutions. This is how it happens – and you have a front row seat on the bow – as the old reigning paradigm goes down, lashing about as the new one rises. Over the course of the next 5 years the euro currency will unravel, Japan will likely (not for certain) have a calamitous breakdown with a renting of its tightly woven homogeneous social fabric, mild deflation will remain the order of the day here in the US, and growth across the globe will disappoint.
JDH: Those may not be your points, but they most certainly were mine. Amen, Jim. And thank you again. Furthermore, let me honor you for your courage. I suspect all this has opened your eyes wider. And that your economics will never be the same after this. These are great scientific questions. Did Darwin get every i dotted and t crossed in his notes when he first stepped onto the Galapagos? For this kind of triviality are RR being pilloried. While the deeper reality is not i’s and t’s. Belief systems are being threatened.
@jd351, no one seems to be paying attention to current events, JDH included. So what happened in Italy from the summer when Italy’s yields were ~6% to now when they are 4%? Their deficits were not reduced, nor has any debt reduction taken place.
Let’s just review where we are for a moment:
First, HAP writes a paper that impugns the motives and integrity of two very well-respected researchers by suggesting that they intentionally suppressed data and used unorthodox estimation methods in order to reach their influential results. Then, Krugman picks up his megaphone at the NYTimes and repeats the charges. Other bloggers follow suit and soon journalists are writing that a spreadsheet error has invalidated R&R’s work as if it’s an established fact. Along the way, no one investigates whether these outlandish charges are actually true. People who don’t know the facts begin to question all of R&R’s work.
JDH investigates and shows that the charges are indeed false while providing a lot of careful explanation. With his usual fairness, JDH gives HAP a forum to respond and make their case. JDH then points out that HAP did not respond to his points. HAP then disappear without any correction or acknowledgment that they were wrong. Krugman and the other bloggers retract nothing. If they had any integrity, they’d apologize, but their political goals are much more important. Most likely, they will keep repeating their discredited charges.
JDH, it may be disconcerting to read all these hostile personal attacks from these commenters but it really means you’ve won. No one is attempting to defend HAP’s original points. And to the extent that anyone responds to your point about “This Time Is Different” it’s to make non-specific charges. These guys don’t want to admit that you’ve proved them wrong. They are just throwing new charges out to obfuscate the fact their little witch hunt failed, at least on these pages.
JDH, congratulations to you for standing up for the truth. You’ve done a great service for economic research.
As I recall, the Maastricht Treaty used 60% as the prudent GDP to debt level. So has the IMF historically.
Yet we are now saying that 90% is OK?
What we do know is this: To repay or service this debt, government spending on programs will be lower, and taxes will be higher. Thus, the standard of living of both recipients of government spending and taxpayers will be lower than they would have been, even if GDP growth is acceptable.
The balance will go to bond holders, many of whom are foreigners. Thus, we will have to either export more or import less. In either case, our GDP will be higher than our standard of living, and that is reason enough to be cautious with debt.
JBH For 60 years macroeconomists have said just that – debt doesn’t matter.
No, as best I can remember only Dick Cheney said debt and deficits don’t matter.
Here’s where you’re getting confused. Keynesian economists argue that cyclical deficits are not necessarily a problem, and in some circumstances cyclical deficits can be helpful. Other than Dick Cheney no one says consumption oriented structural deficits are ever a good thing.
“The big question today is not how economies do with high debt after a war, but how to handle high debts in peacetime. After a war, when physical capital is destroyed, but human capital remains, it is often possible to rebuild faster. There are also many efficiency benefits from releasing wartime controls and bringing manpower to productive use. But the first few years of such experiences, in any event, might not necessarily capture the problem that one is interested in, of today’s peacetime deficits.” – Reinhart and Rogoff 4/25/13 NYT
Apparently not content with seeing their reputations savaged, R & R decided to commit credibility suicide by making it clear they don’t know when their country is at war. Is this time different from other wartimes?
Rick Stryker Let me help you out. First, I have not read the final version of R-R’s book This Time is Different; however, I did have the opportunity to read the draft version. I’m assuming the two versions are reasonably close. The main original contribution to the R-R book is that there are different kinds of recessions, and financial recessions take a very long time to recover from. This was a valuable contribution to the literature and was well timed. The fact that slow growth and high sovereign debt levels are correlated was not original research. Hell, decades ago I wrote a paper that looked at per capita income growth in late 14th/early 15th century Wars of the Roses and Angevin territorial wars. [Sovereigns had to borrow.] What would be original research is showing that high debt levels causally lead to low growth. In other words, look for weak exogeniety. Oh wait…someone already tested that and it didn’t pan out.
It is true that HAP did not address some of the other series. To be honest, addressing their long data set would not be worth sacrificing innocent electron lives. If you want to argue for fixed or random effects panel models, then it is absolutely crazy to include 1790 American data in the same time series as 2009 data. These are, for all practical purposes, completely different countries. 1790 America is more different from 2009 America than 2009 Greece. It completely defeats the intent of a panel model. The only time series worth discussing is the most recent one.
Regarding the mean/median estimates. The first thing to note is that R-R have essentially abandoned their claim about the significance of the mean. That’s fine, when R-R’s supporters were talking about the “Law of Finance” discovered by R-R it was the mean estimate that got all the attention. So what about the median estimates? Well, yes the two estimates are fairly close. But is that an argument for taking their median calculations seriously? I don’t think so. First, note that what R-R actually did was to take a median of means, not a median of medians. Big difference. And if R-R wanted to impart a fixed effects panel data interpretation, then why did they take the mean and median values of the panel data intercepts? What’s the point? They also didn’t tell us if those statistics were in anyway significantly different from values in the other bins. Compare the mean and median values and tell me that you don’t see a whole lotta skew. Bottom line is that the less said about R-R’s mean and median statistics the better. As I said before, if this were my study I would have taken a variance weighted geometric mean to try and capture the center of gravity. And given that there were 96 observations greater than 90%, I probably would have added a 90%-120% category. It’s well known that the last bin of any histogram will always show a spike if the data is highly skewed.
No one is arguing that high debt isn’t a concern. No one is denying that high interest rates could be a problem a few years down the road. R-R allowed or allowed others to overstate “the tipping point nature of the 90% “threshold. They also allowed VSPs to believe their paper found a causal connection. The VSPs did not read the footnotes, so it was R-R’s obligation to correct the record. I don’t know either Reinhart or Rogoff, but on television they certainly seem pleasant and genteel. But gentle hearts and courtly manners are not the same as moral courage. And that was their biggest failing. R-R simply did not make any efforts to correct the record when they surely knew that their work was being oversold.
2slugbaits,
You are severely underestimating the value and contribution of “This Time is Different.” The book brings together 800 years of history of financial and banking crises along with a framework for understanding them and a new, original data set for empirical study. It’s an important contribution that I believe will be to banking and financial crises what Burns and Mitchell was to business cycle measurement.
If you are worried about data going back to 1790, then you must be even more concerned about the way HAP didn’t take changing means into account in their weighting method. Let’s not lose focus on the issue at hand. HAP said that what R&R did in calculating the mean was “arbitrary and unsupportable” and called it an “error,” which they lumped in with the spreadsheet and transcription error. JDH showed that that’s ridiculous to call it an error. In fact, if any method is arbitrary and unsupportable, it’s the HAP method, as the discussion around fixed and random effects makes clear.
I don’t want to get into a discussion about the median because that will distract from the point people need to focus on. HAP discussed the mean not the median and said R&R made an “error” in calculating it. That charge was a major criticism that HAP used to impugn the professional reputations of R&R but HAP in the end could not defend their incompetent and irresponsible argument. (HAP’s other major charge, that R&R somehow should have used data that they didn’t have, is even more absurd.)
Before we talk about what R&R’s responsibilities should have been to clarify the 90%, let’s first talk about what the responsibilities of HAP, Krugman, and the other members of the lynch mob should be now. They need to retract their mendacious statements from their web sites and apologize to R&R. They need to contact the journalists and other VSPs that they falsely influenced and set the record straight about R&R’s work so that these journalists can also print a correction. And they need to contact the VSPs at the G20 that John Taylor referred to on his blog to relieve their concerns about the “errors” they heard about. Once that happens, we can talk about what R&R’s obligations should have been.
Rick Stryker says, “Krugman followed up with “Further Further Thoughts on Death By Excel” here: http://krugman.blogs.nytimes.com/2013/04/17/further-further-thoughts-on-death-by-excel/ There he points to an OECD paper http://www.oecd-ilibrary.org/docserver/download/5k918xk8d4zn.pdf?expires=1367246350&id=id&accname=guest&checksum=9A9778958C5F0B1B0CD0969DE68BD333 and reproduces a chart from the paper that purports to show that R&R have not been supported by other research findings.
Rick, if you’re this poor at reading, you should just give it up. What Krugman says is, “At this point, however, it’s reasonably clear what the data will say, because others have created data sets that more or less match what R-R claimed to have looked at; e.g., this working paper from the OECD.”
Krugman is saying exactly the opposite of what you claim he is saying. Almost everyone (I think with the sole exception of the MMT people) agrees that there’s a negative correlation between debt and GDP. Where Krugman says that the evidence does not support Reinhardt and Rogoff is on the designation of 90% as some catastrophic point past which economies sail into a black hole.
Unfortunately, you’re as bad at linking as at representing what Krugman had to say, so I can’t find the OECD paper to which you refer to see if it says what you think it does (their guest links expire, you see). Next time, please provide the title and use HTML linking.
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JDH, I am sorry that some comments have strayed off into the personal. However, please keep in mind that the issue of a debt cliff has had serious real-world consequences. Just as you would like others to concede up front that debt hinders growth, perhaps you could concede up front that slashing government spending up front to avoid a debt cliff also hinders growth. I’m sure that this is consistent with your understanding of macroeconomics, and I think it would help the conversation.
I also think you should not minimize the calculational error Reinhart and Rogoff made.
_______
JBH says, “The economy is now in the high debt region. More stimulus would drive the debt even higher.”
This kind of claim is so broad as to be automatically false. To take an example relevant to the sequester, Head Start funds have been cut. Some parents, unable to get childcare, will be forced out of the workforce. They will stop paying taxes. Depending on their wages and the cost of Head Start, the effect could be to increase, decrease, or leave unchanged the deficit. It really matters what stimulus is spent on. The evidence is pretty clear that tax cuts for the rich cause deficits to rise. Maintaining bridges, arresting terrorists, educating children, and other spending can cause the deficit to fall. In many cases, the effects may not show up for years, so it’s not a trivial task to decide whether stimulus will increase or decrease the debt.
JBH also says, “how is it ever possible to get into long episodes of 90% debt overhang if government responses prior to the 1930s (in the long RR data series) was austerity?”
What do you mean “get into”?
Looking at the data you link, from 1944-9, US debt was greater than 90%, but we had a boom lasting decades. If we had believed Reinhart and Rogoff, we would have surrendered to Germany and Japan, seeing that the situation was hopeless.
As I have pointed out elsewhere, private debt is really the more important consideration with regards to growth, since that affects the decisions of consumers and businesses. Public debt is only important when it crowds out other activity either through causing substantially higher interest rates or because it requires higher taxes to service the debt.
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2slugbaits says, “No one is arguing that high debt isn’t a concern. No one is denying that high interest rates could be a problem a few years down the road. R-R allowed or allowed others to overstate “the tipping point nature of the 90% “threshold. They also allowed VSPs to believe their paper found a causal connection. The VSPs did not read the footnotes, so it was R-R’s obligation to correct the record.”
Thank you for saying this. (I would take a minor exception: some MMT people apparently believe that high debt isn’t a concern. But they’re a small minority). Economics used to be called “political economy,” which emphasized the connection between economic studies and political decisions. A shame that the name has been changed.
Another point that is being missed: Krugman is speaking as a public intellectual in the mold of JK Galbraith, Stephen Jay Gould, or Carl Sagan.
Public intellectuals oversimplify, use rhetorical legerdemain, and otherwise speak differently than they would do in the academic context. That’s because they’re speaking to the public rather than to their peers.
One can criticize them. But years and decades later, people remember the public intellectuals as men (or women) of courage, who said what mattered when it mattered. Their critics are generally forgotten.
“Galileo, son of the late Vincenzo Galilei, Florentine, aged seventy years, arraigned personally before this tribunal, and kneeling before you, Most Eminent and Reverend Lord Cardinals, Inquisitors-General against heretical depravity throughout the entire Christian commonwealth, having before my eyes and touching with my hands, the Holy Gospels, swear that I have always believed, do believe, and by God’s help will in the future believe, all that is held, preached, and taught by the Holy Catholic and Apostolic Church. But whereas — after an injunction had been judicially intimated to me by this Holy Office, to the effect that I must altogether abandon the false opinion that the sun is the center of the world and immovable, and that the earth is not the center of the world, and moves, and that I must not hold, defend, or teach in any way whatsoever, verbally or in writing”
While I agree with James Hamilton that RR have made exceptional contributions to economics in their 2009 book, just by compiling the data alone, they have not acquitted themselves at all well since the HAP controversy exploded.
1. In their recent NY Times op-ed, they characterized HAP’s working paper as “sharply worded.” Anyone who has read HAP knows what pains they took to be judicious, respectful and non ad hominem, never accusing RR of cherry-picking data or tendentious methods.
2. RR have played a double game, sometimes emphasizing the 90% as some kind of established cliff, sometimes saying there’s nothing magic about the number.
3. The level of data shoddiness, Excel incapability, and hidden methodological assumptions (even if you would agree with them) revealing by HAP in RR 2010 is shocking. I would fail a first-semester student who turned in such work. How can anyone trust anything RR published now? I cannot even determine where RR got their New Zealand growth rates from. They do not correspond with the three available series from Statistics New Zealand/Maddison Growth Project.
4. Finally, this is a catastrophe for the economics profession collectively. RR 2010 was never refereed and their data and methods were not opened to public scrutiny until RR (now undoubtedly to their regret) gave them to what they must have thought was a harmless grad student, Thomas Herndon, three years later. Are we going to have to send undercover agents into econ labs in the future to check their work? This is no way to run a scientific discipline.
Jim: Very well put. “When ignorance gets started it knows no bounds” (W. Rogers). The “debunking” theme of the past two weeks demonstrates this well.
2Slugbaits: I repeat: For 60 years macroeconomists have said just that – debt doesn’t matter.
… most students were left with the simple idea that the national debt need be no concern because it is simply transferring money from one part of society to another—“we owe it to ourselves,” as most readers of Economics heard Samuelson’s message. – Economics as Religion: From Samuelson to Chicago and Beyond, Robert Nelson, 2001.
… For government, however, there was no such temporal transfer. It was held to be impossible to implement a transfer of cost or burden through time because government included all members of the community, and, so long as public debt was internally owned, “we owe it to ourselves.” Debtors and creditors were mutually canceling; hence, in the macroeconomic context, the society could never be “in debt” in any way comparable to that situation in which a person, a family, a firm, a local government, or even a central government that had borrowed from foreigners might find itself. … This argument was deceptively attractive. It did much to remove the charge of fiscal irresponsibility from the deficit-creation position. – Democracy in Deficit: The Political Legacy of Lord Keynes, Buchanan and Wagner, 1977.
We have here of course the mainline of economic thought on deficits and debt: Keynes, Samuelson, Heller, Cheney … Sorry you missed the first part.
JBH, I see I was too tired to quite get what you were trying to say when you asked how it is possible for governments to “get into” high levels of debt overhang if their policy is austerity.
Your question exposes a subtle misconception at the heart of understanding debt: the assumption that debt is the result of spending too much. But debt is the consequence of spending more than is taken in taxes.
To reduce deficits and therefore debt, tax rates can be raised, tax collection made more efficient, spending on things that do not help economic growth can be cut, or more money can be spent on things that do promote growth.
Would anyone seriously suggest that we stop enforcing laws, maintaining highways and bridges, educating children, funding research, and so on? No. We understand that without these activities, growth would slow or cease. And yet many among us cannot seem to understand that our level of funding of many things is sub-optimal.
So, how do nations end up with high levels of debt? Sometimes by not spending on things that produce growth. If one looks at nations that are basket cases, nations like Haiti, generally they are run by a wealthy elite that refuses to pay the taxes necessary for basic health, education, infrastructure, and so on.
Charles II,
On a simple level, your comment illustrated my point that Krugman can post a paper that directly contradicts the argument he is making and his readers won’t even notice. Apparently, you don’t realize that you can just click the link that Krugman provided to read the article yourself? I wonder if that’s a widespread problem with Krugman’s followers? That would certainly explain why Krugman would have the confidence the post an article that contradicts him. Oh well, to make it easy for you to google, the article is
“Public Debt, Economic Growth, and Non-linear Effects: Myth or Reality” by Balazs Egert.
At a deeper level, your comment also illustrates my point. You didn’t have to read the article because I quoted the relevant sections directly to you. Krugman is saying that there is a negative correlation in the data but that we already know that there is no threshold. Then he posts a paper that lists 7 recent papers by prominent researchers who do find evidence for such a threshold in support of R&R. Here is the quote again from page 5 so you know where to find it.
“Many recent empirical papers sought to pin down and explain the possibly nonlinear negative
relationship between public debt and growth. Most of these papers broadly confirm that the turning point beyond which economic growth slows down sharply is around 90% of GDP. Cecchetti et al. (2011) find a threshold of 86% of GDP for a panel of 18 OECD countries and for the period from 1980 to 2010. Padoan et al. (2012) report similar effects for a similar group of countries but a longer period (1960 to2010). Covering a mix of advanced and emerging market economies, Kumar and Woo (2010) finds a turning point at 90% of GDP. Checherita and Rother (2010) and Baum et al. (2012) report similar results for a set of euro area countries. But Caner et al. (2010) and Elmeskov and Sutherland (2012) show that the tipping point is probably lower: 77% for a set of 77 countries, and 66% for a dozen of OECD countries,respectively. Finally, in a recent contribution, Panizza and Presbitero (2012) argue that a negative correlation between debt and growth does not imply causality, as lower growth can result in a higher public debt to GDP ratio.”
No wonder Krugman gets away with these shenanigans. You show Krugman’s zombies direct evidence of his chicanery and still they don’t believe.
I too felt a ping of sympathy after the blogosphere erupted in R-R war chants. The problem was that the Massachusetts scholars took issue with one of the statistics most applicable to the US, and therefore most often cited.
Rogoff, for the most part, seemed not too hung up on that point. He has encouraged prudent increases in infrastructure spending for a while — despite their categorization of illiquid assets.
Stryker,
No one cares about your irrelevant garbage papers published in the Koch Brothers Quarterly Journal of Economics.
Krugman, in contrast, thinks so little of you that he believes he can post a paper that directly contradicts him and you won’t even notice.
Sadly, that pretty much summarizes the public economic debate today. If you didn’t know anything else about the subject, you could pretty clearly tell who was right just by how the debate is conducted.
Anyways, I’ve said all along the whole R-R debate is a sideshow. You don’t reduce your national debt/deficit to grow faster, you do it to avoid a sovereign debt crisis. This whole imbroglio is like an argument over whether the quality of violin play suffered while the Titanic was sinking.
But the pro-insolvency crowd wants to have this little debate, because they’ve been going around claiming if austerity doesn’t lead to growth the policy failed (and then measuring an accounting identity to “prove” themselves right), even though that’s tangential to the main policy objective.
‘Did you even watch the Colbert Report episode?’
That settles the issue!
‘Stryker,
‘No one cares about your irrelevant garbage papers published in the Koch Brothers Quarterly Journal of Economics.’
You mean except for Krugman, that is.
Dick Cheney: “You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.”
— to Paul O’Neill, Treasury Secretary in “The Price of Loyalty” to justify tax cuts for the rich squandering the budget surplus handed to him by Clinton.
JDH “When I see a bully, I am willing to stand up to them, even at personal cost to myself.”
Now, I believe this, at least.
@Nick : the Koch Brothers Quarterly Journal is fun reading, you are wrong, they have a decent number of hit-counts. I mean, people want to have something to laugh, isn’t it that way.
Greetings from Europe, folks.
Now, I believe, the WSJ will stop citing the 90% threshold because they will have to choose between RR and unfunded social liabilities. After all, if liabilities exceed 550% of GDP , we must have been dead for many years.
Nick,
What is the Koch Brothers Quarterly Journal of Economics? I assume that this is some sort of insult but I can’t be insulted if I don’t know what you are talking about. Can you please clarify your personal attack?
@Rick ViolentlyStrykingTheLowerClassesWithInequality
I was insinuating that you are cherry-picking right-leaning papers by right-leaning authors to support your “thesis” that high debt levels lead to low GDP growth.
Rick Stryker: you make the point that you can give the wrong link, then berate someone who tries to follow it as an idiot because they should have looked at the Krugman article where it is rendered correctly instead of at your work.
With arrogance like that, are you sure you’re not Reinhart or Rogoff?
You may be surprised to learn this, but we are not required to accept Balázs Égert’s judgment that “The economics profession seems to increasingly endorse the existence of a strongly negative nonlinear effect of public debt on economic growth.”–nor is Krugman in linking the article endorsing its assertions. Indeed, Égert himself thinks that Reinhart and Rogoff are wrong, that the debt cliff “kicks in at much
lower levels of public debt (between 20% and 60% of GDP).” Perhaps Krugman linked that particular paper to highlight a distinction that may not be obvious to you– that there is no agreement on where this “cliff” is.
What’s pretty clear to me is that you have never dealt with issues that aren’t black and white… like, say, peer-reviewed papers. Perhaps that’s why you think that calling people “zombies” because they have another point of view is clever.
Nick,
I didn’t pick those papers. Those are the papers cited in the research that Krugman chose. And if you looked at that OECD paper that Krugman picked, you’d realize the authors of the research that back up R&R are from the World Bank, OECD, ECB, and the IMF.
So, let’s review: Krugman in the second blog post I cited doubled down on the “HAP smear” of R&R by asserting that we already know that R&R are wrong about their debt threshold claim. As evidence, he pulled a chart from a paper that contains references to 7 papers by research economists at non-partisan central banks and international policy organizations that in fact support R&R’s claim. And the paper he cited itself supports R&R.
Doesn’t that bother you on some level? Don’t you wonder how that could have happened?
Can’t you see that JDH is right that R&R are being bullied?
Hi everyone, this has gone on for about 2 weeks now, and I have found it entertaining, but I have stayed silent. Indulge me now.
@Nick “Rick ViolentlyStrykingTheLowerClassesWithInequality”
No he isn’t. Please think of the lifestyles of the lower classes. They do not have the savings we “1%” have. So the most egregious “stryking” that creates inequality is to promise to the lower classes a future benefit that cannot actually be provided. That is the great tragedy of the modern entitlement system, but Rick isn’t the one doing it.
Nick wrote: “you are cherry-picking right-leaning papers by right-leaning authors to support your “thesis” that high debt levels lead to low GDP growth.”
That one did get a big belly laugh out of me. Holy cow, you linked to EPI earlier in this thread, and then have the gall to attack Rick’s links. All Rick’s attributions combined don’t contain as much politicized, commonly refuted junk science as EPI. How many union presidents are on the EPI board? 9.
You give yourself the liberty to use EPI as a legitimate source, then want to disparage Rick’s links? Scholarly discussion must be cleansed of “right-leaning papers by right-leaning authors” but your actions show you engage in this ad hominem thought cleansing to insert left-leaning papers by left-leaning authors. In my class, writing such hypocrisy would get you failed, have fun retaking that class in Summer school.
JBH, thank you for quoting “we owe it to ourselves.” After all the pages of replies on Econbrowser, I would’ve committed a felony against my computer monitor if I had read one more version of “Nobody is saying debt doesn’t matter.” I know not how many people 2slugbaits interacts with, so I assume he believes what he writes. However, many on the left side of the aisle (a non pejorative term I think everyone can live with) do in fact say that the debt does not matter. We can print endlessly. I hear/read that commonly.
By coincidence, just yesterday I was engaged with someone about NASA’s impending budget cuts, and we were told _everybody_ knows taxes have to go up. My response? The often cited: even 100% taxation of millionaires doesn’t cover all the government’s red ink. The obvious response was: _everybody_ knows that no nation that prints it’s own currency can ever have a debt crisis. That’s probably true, depending on how clever the definition of “crisis” is. Beware of anecdotes, but there is mine.
To Prof. Hamilton, thanks for taking the time to write about R/R. At the time it came out, I found their paper interesting, but too dense to really get the nuances. I doubt I even finished the whole thing. You really gave readers a better insight into R/R’s work, and you did it with as much brevity as possible. It’s really appreciated.
Plus, you must feel pretty happy when Bloomberg, hardly a right wing station, called you the world’s foremost econometrician last week. 🙂
My 2¢ guys
JBH most students were left with the simple idea that the national debt need be no concern because it is simply transferring money from one part of society to another—“we owe it to ourselves,” as most readers of Economics heard Samuelson’s message
UGH! Yikes. You have badly misunderstood what Samuelson and others were talking about. You win the Ricardo Award for misunderstanding what economists are saying. Samuelson was arguing against the idea that deficits represent borrowing from the Ghost of Christmas Future in the simpleminded way that the man-on-the-street thinks of household borrowing. Seriously, Samuelson knew all about Harberger triangles, distortions from future taxes and intra-generational inequities that come about from higher debt levels. You really need to catch up.
Rick Stryker I’m amazed at how you could spend so much time reading Krugman and yet somehow manage to completely botch what he was saying.
omits the fact that R&R have been completely open about their data and share it with other researchers
You just changed Krugman’s words. Krugman’s complaint was that R-R did not share their spreadsheet or methodology, not that they didn’t share their data. You are the one who said “data.”
Krugman then acknowledges that R&R never really said that debt necessarily caused slow growth, but holds them responsible nonetheless
Let me translate. Krugman was saying, in a fairly polite way, that R-R were moral cowards because they did not feel any need to correct what their papers actually said. They allowed others with political agendas to read more in their findings than was actually there. There’s an old saying that silence is concurrence. And R-R were silent when others went beyond what their papers actually claimed. It’s beyond me how you do not see this very basic and central point.
So R&R are guilty because of how others have interpreted their work.
Yes. Especially when a US Senator misinterprets their work and Carmen Reinhart just sits there and allows the Senator’s comment to pass. And was it really too much to expect Rogoff to stroll down the hall a few paces and tell his colleague Niall Ferguson that the 90% threshold did not have the status of a “Law of Finance”? And oh by the way, I think it’s fair to say that you were also one of those who was guilty of overstating the significance of the 90% correlation threshold.
Contrary to Krugman’s assertion, the point of the OECD paper is not to debunk R&R but rather to attempt to estimate the non-linear threshold endogenously
Let me suggest that it’s you who have misinterpreted the OECD paper. Please reread Krugman’s comment and the OECD paper…and read for comprehension this time. Krugman is saying almost exactly the opposite of what you seem to think he is saying. Part of the problem is that you seem to think Krugman is claiming higher debt levels are nothing to worry about and there is no correlation between high debt levels and lower economic growth. To be clear…that is NOT what Krugman and others are saying. Very few people deny that there is a correlation between high debt levels and weak economic growth. But claiming that the direction of causation runs from high debt to low growth is not supported by the evidence. A lot of evidence points to the causal direction running the other way. Krugman and others also deny that the 90% value is actually a threshold in the sense of being the kind of bright line that R-R suggested…or at least encouraged VSPs to believe. And the huge difference between the mean and median values found by R-R ought to tell you that the 90% “threshold” value is very dubious because it pulls in a lot of extreme outliers.
Charles II,
I’m not asking you to accept Egert’s judgment. I’m merely pointing out to you that Krugman asserted that enough researchers have created data sets that are similar to R&R that we know what the data will say–that R&R’s 90% threshold point is wrong. Then Krugman cites a paper that references 7 papers that broadly validated R&R’s 90% threshold. You can hardly say that Egert is supporting Krugman since he finds the threshold could be even lower than 90%. The implication of that would be to be even more cautious about increasing the debt, a policy position that Krugman of all people does not want to endorse.
I use the term “zombie” because I’m always amazed at how Krugman’s followers seem to be immune to any evidence that their master is wrong. As I think about it, you are probably right that zombie is the wrong term to describe you and like-minded commenters. I think you are suffering from Stockholm syndrome.
I don’t mean the syndrome in which a captive develops sympathy for his captor, although that’s related to the malady. In Stockholm syndrome, the leader makes a pilgrimage to Stockholm, whereupon he receives a prize that guarantees his absolute infallibility henceforth. The leader’s disciples can then rest assured that whatever the leader says is absolutely true, at all times and on all issues, no matter what the evidence to the contrary.
For example, if the leader writes about macroeconomics, whatever he says is absolutely true, even though the leader has in fact done very little academic work in macroeconomics. We are allowed to completely discount the contrary views of economists that have a long publishing record in macro. In the case of R&R, if the leader posts a paper that directly contradicts the point he’s making, we know automatically that he hasn’t contradicted himself. It’s up to us to search for the deeper meaning instead. Perhaps the leader was actually trying to show us that the threshold is uncertain. Or the leader is speaking as a public intellectual and must necessarily simplify his points. Skeptics might think that when the leader cites a paper that directly contradicts the point he’s making, that means he’s wrong. But not so–that’s black and white thinking you see.
I’m not suffering from Stockholm syndrome. In my world, you either have the facts or you don’t. Both HAP and Krugman are clearly wrong. They impugned R&R’s reputations unjustly and should retract and apologize. The reason they won’t and don’t need to is that you and the other apologists for them won’t hold them to any standard of proof or fair play.
What’s the point of knowing the difference between right and wrong or truth and falsehood if you react with indifference when a choice between them is presented to you? Many a songwriter and rock band has called for politicians to quit using their songs at campaign rallies or as campaign theme songs. They do not want their work associated with views they consider wrong.
Paul Ryan’s simple-minded excuse for a budget plan cited one pair of economists – R&R.
The Dixie Chicks would have disassociated themselves with Ryan and his budget in two seconds, Springsteen three seconds, Bon Jovi four seconds, and Arcade Fire five.
The silence from R&R is all you need to know.
Rick Stryker: “Contrary to Krugman’s assertion, the point of the OECD paper is not to debunk R&R but rather to attempt to estimate the non-linear threshold endogenously, which the author finds to begin to bind at much lower values than the 90% that R&R proposed as a marker for a high debt regime.”
I think you are interpreting non-linear a little too specifically.
Page 7: “First, for all countries and for the group of developed countries, growth remains broadly stable as public debt increase from the range of 60% to 90% of GDP to above 90%. This suggests the absence of any sudden change (fall) in growth rates beyond 90% of the public debt-to-GDP ratio. As a matter of fact, for these two samples, growth rates appear to decline gradually with the rise in public debt from the range 0% to 30% to above 90%. Growth even seems to increase slightly once the debt ratio is above 90% for some periods”
Page 13: “Simple bivariate panel regressions yield a negative link between growth and public debt. The coefficient is always negative but its size is not particularly large in economic terms: a 10 percentage increase in the public debt ratio is associated with 0.1 to 0.2 percentage point lower economic growth.
…
As for the nonlinear specifications estimated using threshold values taken from Reinhart and Rogoff (2010), the results again show some instability. The estimated coefficients are not significant at the 10% level for 1790-1939 for the samples including all countries and the advanced countries only and for 1946-2009 for the smaller group of emerging countries.
…
For the two- and three-regime models, it indeed seems to be the case that the negative coefficients of the growth rate of debt increases with a rise of the level of debt. But for the 4-regime models, the negative coefficient for debt ranging from 60% to 90% of GDP is lower if debt is lower than 60% or higher than 90%
A serious problem with the correlation between public debt and growth is that any change in the growth rate of real GDP will have a mechanical effect on the debt-to-GDP ratio. Therefore, we re-estimate the nonlinear specifications using the lagged public debt-to-GDP ratio … Astonishingly, the results show the absence of any negative correlation between the growth rate of debt and economic growth for debt levels exceeding 90% of GDP.”
Page 18: “Nevertheless, the estimation results, both for the contemporaneous and lagged level of debt, indicate that higher debt is accompanied by higher economic growth (Panel B of Figure 5). Not quite the results we were looking for.”
Rick Stryker says, “I use the term “zombie” because I’m always amazed at how Krugman’s followers seem to be immune to any evidence that their master is wrong.”
No. You use the term “zombie” because you wish to convey your contempt for people who disagree with you.
Just as saying that a man who has written a textbook on macroeconomic “has in fact done very little academic work” in the area. Very little compared to, say…you?
The fact that Égert can cite a few papers that suggest that there is a debt “cliff” somewhere is hardly a validation of there being a cliff existing at 90% debt/GDP. If I say that the eastern edge of the western land mass is at 74 degrees west, and other researchers find values ranging from 87 degrees west to 43 degrees west, it might mean that there is an edge to the land mass–or not. What it does make clear is that there’s so little agreement on the issue that one shouldn’t be making policy that will make or break people’s lives based on a value with a standard deviation approaching infinity.
You’ve ascribed motives to Krugman–and to me– in a way that is more personal and defamatory–and less substantiated– than what I have seen written about Reinhart and Rogoff. You see no irony in this.
Stryker: in this discussion , what I learnt is that RR results are not robust, since other very defensible weighing schemes led to very different results. Am I wrong?
Second point: I think everyone agrees that politicians were throwing up and down (wrongly) the 90% threshold, and RR just kind of went along.
Finally, the practical results of the lets-drive-down-the-debt/gdp-ratio-at-all-costs here in Europe, is it working?
“Public debt is relevant only to the degree that it crowds out private borrowing, thereby requiring either higher taxes, inflation, or austerity.”
Sorry, but that is ridiculous. Overall debt will also affect consumption and investment decisions.
Take the recent news that Obama has 800K debt at almost 6% interest, but owns 3 million treasuries. Selling 800K in treasuries would allow him to boost his savings and investment and consumption.
Likewise, govenment consumption does not improve the consumer’s position. It raises prices, leaving them less discretionary disposable income and increases the consumer’s total debt burden. Borrowing for consumption, even at a very low rate, when there is existing large debt at high interest is a very, very bad judgement.
Charles II,
Actually I’m making a serious point in my use of the terms “Krugman zombie” and “Stockholm syndrome.” A Krugman zombie is somebody who falls under Krugman’s spell and mindlessly repeats Krugman’s arguments, often using his terms (as 2slugbaits does with “VSP”). The reason this happens is that Krugman is an uncommonly effective writer who implicitly knows how to use rhetoric. I already pointed to some of it: his ability to insinuate, his outsourcing of analysis, his use of “everybody knows” or “it’s already been demonstrated” constructs without being specific about who he’s talking about, and his ability to coin memorable terms. One of his key techniques is the use of studied imprecision of language. Like every good politician, Krugman is just imprecise enough that the reader can substitute his preferred meaning while Krugman always has deniability in case he is subsequently challenged on some point. And, that imprecision means that his zombies can always defend him, since they can substitute his meaning after the fact.
Stockholm syndrome (SS) occurs when someone thinks that because Krugman got a prize in Stockholm, he’s automatically credible on any issue in economics. Brace yourself, because this is going to be jarring but necessary to hear if you want to cure yourself of Stockholm syndrome: Krugman is not an expert in macroeconomics.
Years ago he did first rate work in international trade and economic geography, but those fields have little to nothing to do with macro. He gave up economics some time ago and is now basically a journalist with a political agenda. Yes, he wrote a textbook and knows undergraduate macro models, but that’s all he seems to know.
I invite you to compare the publication record of Krugman and Rogoff in international macro and international finance. Rogoff just blows Krugman away. Rogoff is a giant in the field. Krugman can’t every be accused of a spreadsheet error because he has no spreadsheets. He doesn’t do any work in international macro. At the same time, Rogoff (along with Reinhart) is doing seminal work.
I mention all this because I think Krugman played a crucial role in the HAP smear. If you can throw off the tentacles of Krugman zombieism and Stockholm syndrome and can come to the realization that you should discount Krugman’s views, then you can more easily see that HAP did a hatchet job on R&R.
Marco,
Yes, I think that’s the wrong takeaway from these posts. What’s been lost in all this hullabaloo is that R&R in their 2010 paper had already done a robustness analysis by computing both the mean and the median. HAP took issue with the mean but even if you buy all of their criticisms, their mean number is basically the same as R&R’s reported median number. Moreover, 6 months before HAP, R&R had already significantly updated their data sets and were reporting numbers very much in line with HAP’s preferred numbers. Thus, you don’t really need to take a stand on whose weighting scheme is right since they don’t really disagree in a big way on the bottom line.
R&R’s point is that a decline of even a percentage point of real GDP growth in a high debt regime is very significant, since these high debt periods tend to persist for long periods. 1% accumulated over many years translates into a lot of lost output.
I would not take away your second point, that politicians were wrongly throwing around the 90% number, either. I think what’s happened here is that R&R’s critics have exaggerated this point to be that 90% is some kind of knife edge threshold which, if crossed, all hell breaks loose. Rogoff has tried to correct that misperception. But in doing so, his critics are now exaggerating in the other direction by claiming that he’s backed away from the 90% and is a “moral coward” as 2slugbaits put it for not correcting the record.
But Rogoff isn’t backing away and has no need to correct the record. As I understand him, his consistent point all along has been that the 90% threshold is an indicator of entering a high debt regime, a regime in which the historical record shows a tendency for lower economic growth for long periods of time. Rogoff believes the causation goes both ways–slow growth produces higher debt and higher debt produces slow growth by means of tax increases and crowding out of investment. Thus, I think Rogoff (and Reinhart) believe that there is a policy implication, but not the exaggeration his critics try to pin on them. The policy implication is that when the debt to GDP level goes to something like 90%, the historical record suggests that that’s a serious danger signal for a period of prolonged slow growth. I don’t believe Rogoff would say that the slow growth is automatic or occurs at precisely some level of debt to GDP ratio however. But the 90% is a serious number for policy makers to focus on.
On your third point, I wouldn’t necessarily connect the European economic policy issue to the R&R issue. Europe is complex with a lot of political and economic reasons why they are where they are.
Aaron says, “Overall debt will also affect consumption and investment decisions.”
No one has said different, Aaron. Let me re-phrase it to “Public debt is relevant to the issue of GDP growth only to the extent that …etc.”
This is easily proven by considering the case in which interest rates on debt, public and private, are and will remain zero. Your example of Obama (always risky conflating what happens with individuals to what happens with governments) only works because one interest rate is significantly different than the other.
Your statement that “govenment consumption does not improve the consumer’s position” is also so broad as to be automatically false. Suppose that in a very small economy there is an immensely important skilled worker who falls ill. Since he lacks insurance, the government can step in and pay his bill or it can let him die. If he dies, he can no longer do his job, so the factory shuts down. GDP falls. In this case, government consumption prevents that GDP decline.
That’s true in a less dramatic way for a great deal of government consumption.
I am sorry for you that the world is not black and white. I know it’s much simpler if government is bad, consumption is bad and government consumption is bad squared. But in the real world, the decline of the United States is not due to government consumption. It is due to bad choices in both private and government spending of all kinds.
Rick Stryker I think what’s happened here is that R&R’s critics have exaggerated this point to be that 90% is some kind of knife edge threshold which, if crossed, all hell breaks loose. Rogoff has tried to correct that misperception.
This is patently false. What R-R have done is try and have it both ways. In their more academic papers (and especially in their draft versions) they are properly cautious and do plenty of hedging…mostly in footnotes, but hedging nevertheless. But when they move away from the academic papers and write op-ed pieces and talk to GOP senators they emphasize the 90% threshold as a bright line. Not only do they describe 90% debt as a “threshold” but they also call it an “important marker.” And Rogoff had no public objection when his Harvard colleague referred to the 90% threshold as a “Law of Finance.” In April 2011 R-R met with forty senators and emphasized the urgency of cutting the deficit. According to Sen. Coburn this was the meeting that hardened GOP resolve to not extend the debt ceiling. Cancer clinics are closed because Republicans used Rogoff’s testimony as a rationale for cutting government spending during a recession. Rogoff bears some responsibility for that because he made no effort to clarify his findings and allowed it to be misused. I call that moral cowardice, how about you? And then to further muddy the waters, only four months later (Aug 2011) Krugman and Rogoff were on Fareed Zakaria’s show. Rogoff’s performance was hopelessly muddled.
And this leads to your comment: I think Rogoff (and Reinhart) believe that there is a policy implication, but not the exaggeration his critics try to pin on them. The policy implication is that when the debt to GDP level goes to something like 90%, the historical record suggests that that’s a serious danger signal for a period of prolonged slow growth.
First, that is not a “policy implication.” Identifying something as a “danger signal” is not a policy. A policy is an executed and purposeful plan. And you see this in the Zakaria interview in which Rogoff shows just how hopelessly confused he is when it comes to actual policy choices. For example, at the 10 minute mark he says that he would oppose further stimulus. But only a few seconds later he says that he would support increasing the debt to assist home mortgage issues. And a few seconds later he says that if things got worse then he would be open to more spending. Huh??? So he’d support really really big stimulus programs if the economy gets a whole lot worse, but he won’t support stimulus to keep the economy from getting worse? Does this make any sense at all? He’s all over the ballpark. And then at 13:40 he goes all in for big infrastructure spending! Did he mention this to Republicans in Congress? No. But a few minutes later he takes it all back and opposes infrastructure stimulus.
http://globalpublicsquare.blogs.cnn.com/2011/08/12/gps-this-sunday-krugman-calls-for-space-aliens-to-fix-u-s-economy/
Here’s where Rogoff goes off track. Both Krugman and Rogoff agree that overcoming private debt overhang is critical to getting the economy on track. Rogoff makes a big deal about this and Krugman agrees. The difference is that Rogoff (somehow) believes that it’s possible for households to repair balance sheets without businesses or government wanting to borrow. And you see this in some of Rogoff’s earlier papers in which he worries about total debt (public and private). But in the context of a financial recession with interest rates at the zero lower bound it’s simply not possible for government to cut deficits while households are repairing balance sheets without also shrinking incomes. That’s where Rogoff is just hopelessly confused. A Harvard economist should know this.
Rick Stryker: Krugman never did any international macro? What about “Target zones and exchange rate dynamics” (google scholar citations = 1224), “A model of balance-of-payments crises” (google scholar citations = 3348). Gee, I wish I had done as “little” international macro as Krugman…
@JJ
Right, EPI only publishes junk science because they have the interest of the working/lower classes at heart. Union presidents on a board = making up socialist economics! Everything EPI says is a lie!
Meanwhile, you probably take everything that Morgan Stanley Director Erskine Bowles says about the debt as gospel.
My attacks on Stryker were totally ad hominem and nonsensical for a reason – I felt like stooping to his level. He enters these comment threads with the utmost disdain for anything against his perfectly correct understanding of the world.
Also “So the most egregious “stryking” that creates inequality is to promise to the lower classes a future benefit that cannot actually be provided. That is the great tragedy of the modern entitlement system, but Rick isn’t the one doing it.” What can’t we afford? The 1% of GDP it will take to fully fund Social Security? Food Stamps? We spent that money on Iraq and tax cuts for the top 10% pretty easily.
Menzie,
I said “do,” the present tense, rather than “did.” I’m fully aware of the target zones and balance of payments crisis stuff that he did before he became a journalist. My point is that R&R are out there right now doing serious work, and as such, making themselves targets. Their spreadsheets could be wrong. Krugman is writing short editorials with some charts thrown in. His spreadsheets can’t be wrong because he doesn’t have any.
When you compare their work on international macro, Krugman will of course have some international macro work on his side of the ledger (plus the japan paper in macro, etc.) But that will be dwarfed by what Rogoff has on his side of the ledger. You could start the comparison with Meese and Rogoff, which had a very significant influence on the understanding of open economy macro models. I wouldn’t want to fail to mention Carmen Reinhart as well, who, as you know, has established a huge reputation for her work on financial vulnerability in emerging market crises, balance of payments crises, etc.
I’m not questioning Krugman’s achievements. My concern is that Stockholm syndrome is convincing a lot of people that Krugman has some sort of enhanced credibility on macroeconomic issues that he really doesn’t have. A lot of people think there’s more to the HAP smear than there is because Krugman jumped on the bandwagon enthusiastically. But in the area we are discussing, Reinhart and Rogoff have more credibility.
Rick Stryker: Boy, I hope you do a better job on your literature reviews in the papers you write (if you do write papers). If you want a current paper, then consider, this paper by Krugman coauthored in the obscure (!) serial, The Quarterly Journal of Economics, in 2012. “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach” Google Scholar citations =131 (Unless 2012 is “the past” for you).
And glad you mentioned “It’s baaack: Japan’s slump and the return of the liquidity trap.” Published in Brookings Papers on Economic Activity 1998.2 (1998): 137-205. Google Scholar Citations=931.
The point is not that one is a “better” scholar than another — just that you dismiss Krugman unfairly as a non-macroeconomist who just does “journalism” now.
Dear JDH
Contrary to your impression, I found “This Time Is Different” a terrible disappointment, and should have known at the time how it would all turn out.
First reviews, like yours, were full of praise, and have continued so. Even Paul Krugman, like you seems to think it is a great contribution.
Myself, I walked several miles to read a copy, back in the day, and just scanned through again to confirm my impression.
R&R _have_ done a pretty good assembling of data from 1800 on, mostly from the late 19th. But for them to claim EIGHT centuries was and remains about as bold-faced a lie as their assertion that debt leads to slow growth, when, as Dube showed using their data, much more slow growth leads to debt.
Please, do us a favor, pick up the book again and tell us what’s what in the 13th-17th centuries. Even Hamilton (the other Hamilton) did a better Job. Even the 18th century, short shrift and nothing of much interest to an economic historian.
I’m used to it, these spurious assertions of historicity, but find it appalling for the profession to have swallowed them whole.
Check their bibliography. Do you find Lane and Mueller, 1985 or, more importantly. Mueller, R. C. (1997). The Venetian Money Market, Banks, Panics and the Public Debt, 1200-1600. Johns Hopkins?
Come on, this book is the worst sort of intellectual fraud. Sorry, but making false claims of scholarship is bad. What they sowed in their Emperor’s New History, has now been reaped.
Krugman followed up on R&R today, and although he hasn’t backed off on his criticism of the 90%, he did reiterate his appreciation of “This Time is Different,” calling it “a very good book.”
I wonder if he realized that he had gone too far in his attacks on R&R and was losing professional credibility. Today he said on his blog:
“The fact is that Carmen and Ken are fine economists. Carmen has been doing terrific empirical work on banking crises for a long time. Ken is arguably the world’s leading international macroeconomic theorist. In fact, the main reason I knew that the case for fiscal policy remained strong even in the context of New Keynesian models was that I carefully read the canonical text by Obstfeld and Rogoff.”
Perhaps there is a backlash developing over what happened here. Let’s hope so.
Rick Stryker: I am glad that you now accede to the proposition that in fact Paul Krugman does know something about macroeconomics, and has done in the past and recently theoretical work on the topic. In other words, I am glad you have rescinded your prior statement (May 1, 8:31AM):
It was a fallacious statement on the same order of hilarity as your defense of Governor Romney’s assertion that 500,000 jobs created per month was a typical rate in a recovery (see this post for a reminder).
Menzie,
I can’t rescind a statement I didn’t make. I didn’t say Krugman doesn’t know anything about macroeconomics. The context of my remark is that his followers think his Nobel Prize somehow means that he speaks ex cathedra from Princeton on any economic question. But the expertise for which he received the Nobel Prize is not macroeconomics. I acknowledged that he has written important stuff on international macro. And I’m not trying to minimize his very considerable accomplishments. But Krugman himself acknowledged Rogoff and Reinhart’s achievements in international macro.
However, Krugman’s followers should understand that many of the people he attacks–in my opinion unfairly–e.g., Rogoff, Mankiw, Taylor, Lucas, Cochrane, and recently your co-author JDH, have more expertise on macro topics and are a priori more credible. If the discussion were about international trade or economic geography then Krugman of course would be more credible a priori.
In the end, an argument should stand on its own merits. The qualifications of the person making the argument should not really be relevant. But I only mention it because I think people tend to let Krugman get away with really unfair attacks partly because of his credentials.
I find it very disheartening that you have been only willing to break your silence on this issue to chastise me for my “unfair” comments about Krugman. And yet you have no comment about the unfairness of those who impugn the professional reputations of R&R by asserting that they have committed “errors” for failing to include data they did not have or for using perfectly reasonable estimation techniques. You also have no comment on the unfairness of those who report these assertions in a newspaper and who do not mention the work that R&R have subsequently done.
My comments on the 500K Romney remark should show that I’m not defending R&R because they advance positions that I agree with. As you know, I have argued against R&R’s interpretation of their findings that suggest that we should necessarily have expected a slower recovery from the recession. But I can disagree with them on this point and still have great respect for them and the work they’ve done.
I think they’ve been treated really unfairly. I guess you don’t think so though.
Rick Stryker: Let me requote your exact statement, verbatim:
Seems pretty cut and dried what you meant to say, at least to me. But if I am misunderstanding your words, well, just chalk it up to my inability to understand what seems like ordinary English.
Both Professor Rogoff and Professor Reinhart are professional acquaintances. I once took a class with Professor Rogoff. In post of 4/18, I noted that R&R never made claim for the causal interpretation in their academic writings. And, to boot, both the book, many of their papers, and the 2010 paper are cited as references in my book with Jeffry Frieden, Lost Decades (please buy it!), although we do not cite the average-growth result from their 2010 paper.
R&R’s critics make one fair point that R&R should more explicitly concede: they wrongly promoted and failed to contradict others who promoted the mistaken belief that empirical data supports the notion of a growth cliff after 90% debt/GDP, based on one flimsy calculation that was contradicted by most of their own data and calculations. The fact that they themselves were the ones who collected and first published the data that others are using to call them out for promoting and failing to contradict others who promoted the concept of a threshold at 90% debt/GDP doesn’t excuse that misdeed.
However, the false dogma of a 90% threshold is not the real target of R&R’s critics. They are exploiting that mistake to attack R&R’s two much more important contributions.
The first real target is the completely legitimate and well-supported empirical finding that, on average, countries with higher public debts grow significantly more slowly than countries with lower debts. This finding can’t be contradicted with facts, so R&R’s critics are instead trying to wreck their reputation. The Excel spreadsheet error was a real goldmine for R&R’s critics in this regard.
The other real target of R&R’s critics is their very well backed-up argument that when a belief becomes widespread that age-old economic rules of thumb no longer apply and “this time is different,” that belief is almost certainly wrong. (Unless, say, you happen to be living at the beginning of the industrial revolution.)
Ultimately, R&R’s critics are making a claim that “this time is different”. And, as usual, there are some reasons to believe it could be, at least in the developed world. Graying demographics, private over-indebtedness and investor skepticism of growth potential have altered how developed economies respond to fiscal and monetary stimulus, allowing governments to run larger deficits with less consumer price inflation and lower interest costs.
JDH rightly pointed out the fatal flaw in HAP’s argument, which actually applies equally well to Krugman. They suppose that larger deficits could restore developed economies to healthier growth and thus greater investor confidence. But they push from their minds the corollary that in such a scenario, developed economies would return to the normal situation in which fiscal and monetary stimulus produce larger inflationary responses. That return to greater inflation response is what lies behind the Fed and CBO and other projections that with recovery will come higher interest rates.
There’s also the case of Japan, where large fiscal deficits and monetary stimulus have so far failed to produce recovery. I tend to see our fate being closer to Japan’s experience than the Fed and CBO forecasts. Fiscal deficits produce one-off additions to growth, and only while deficits are being increased. Those one-off additions do nothing to help and probably hurt sustainable growth. Maintaining high deficits is not stimulus. Any reduction of deficits, even if they remain high such as recently in the US and UK, is counter-stimulative fiscal drag. I see no reason to believe fiscal stimulus helps the long run.
It’s not a coincidence that R&R are career analysts of emerging markets, while Krugman and HAP have focused on developed markets. Emerging markets continue to have high inflation responses to fiscal and monetary stimulus. There are numerous examples of emerging markets that pursued fiscal austerity and saw investor confidence and growth revive as a result. Granted it’s much quicker and easier when the country pursuing fiscal austerity is small and not surrounded by others doing the same.
Menzie,
I stand behind that comment and am happy you have given me the opportunity to explain it further.
Krugman’s workhorse model is the undergraduate textbook model IS-LM, which he regards as having the best explanatory power to understand the current crisis. Krugman mentions IS LM so much that he even created a little tutorial for his readers:
http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/
While a devotee of IS LM, he has not been fundamentally involved in the major developments of modern macro–real business cycle models, new Keyensian models, macroeconometrics, rational expectations, etc. and in fact rejects them, as he did famously on the pages of the NYT magazine in his article “How Did Economists Get It So Wrong”:
https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all&_r=0
Rather than listen to me about whether Krugman’s rejection of modern macro makes sense, let’s get the opinion of a recent Nobel prize winner in macroeconomics on whether Krugman is misleading his NYT readers on the state of macro research. Here is a very good interview with Thomas Sargent, who by the way is a Democrat, lest readers think this is partisan in some way:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526
Here is how the interview starts:
Rolnick: You have devoted your professional life to helping construct and teach modern macroeconomics. After the financial crisis that started in 2007, modern macro has been widely attacked as deficient and wrongheaded.
Sargent: Oh. By whom?
Rolnick: For example, by Paul Krugman in the New York Times and Lord Robert Skidelsky in the Economist and elsewhere. You were a visiting professor at Princeton in the spring of 2009. Along with Alan Blinder, Nobuhiro Kiyotaki and Chris Sims, you must have discussed these criticisms with Krugman at the Princeton macro seminar.
Sargent: Yes, I was at Princeton then and attended the macro seminar every week. Nobu, Chris, Alan and others also attended. There were interesting discussions of many aspects of the financial crisis. But the sense was surely not that modern macro needed to be reconstructed. On the contrary, seminar participants were in the business of using the tools of modern macro, especially rational expectations theorizing, to shed light on the financial crisis.
Rolnick: What was Paul Krugman’s opinion about those Princeton macro seminar presentations that advocated modern macro?
Sargent: He did not attend the macro seminar at Princeton when I was there.
Rolnick: Oh.
What? You mean to tell me that Krugman writes everyday about macro issue and has some serious criticisms of modern macro, but he doesn’t attend the Princeton macro seminar? That seminar is his opportunity to explain directly to the creators of the research how they’ve gone wrong and how they should be focusing on the insights of IS LM to make further progress.
I wonder what Sargent thinks of Krugman’s macro views? Let’s see:
Sargent: I know that I’m the one who is supposed to be answering questions, but perhaps you can tell me what popular criticisms of modern macro you have in mind.
Rolnick: OK, here goes. Examples of such criticisms are that modern macroeconomics makes too much use of sophisticated mathematics to model people and markets; that it incorrectly relies on the assumption that asset markets are efficient in the sense that asset prices aggregate information of all individuals; that the faith in good outcomes always emerging from competitive markets is misplaced; that the assumption of “rational expectations” is wrongheaded because it attributes too much knowledge and forecasting ability to people; that the modern macro mainstay “real business cycle model” is deficient because it ignores so many frictions and imperfections and is useless as a guide to policy for dealing with financial crises; that modern macroeconomics has either assumed away or shortchanged the analysis of unemployment; that the recent financial crisis took modern macro by surprise; and that macroeconomics should be based less on formal decision theory and more on the findings of “behavioral economics.” Shouldn’t these be taken seriously?
Sargent: Sorry, Art, but aside from the foolish and intellectually lazy remark about mathematics, all of the criticisms that you have listed reflect either woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished. That said, it is true that modern macroeconomics uses mathematics and statistics to understand behavior in situations where there is uncertainty about how the future will unfold from the past. But a rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math. That’s life.
“…foolish and intellectually lazy remark.” Check. “…woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished.” Check.
If you want to understand what real macroeconomics has to say about current macro issues, I recommend reading the rest of this informative interview, especially if you think you may be suffering from Krugman zombieism or Stockholm syndrome.
Menzie,
On your second paragraph, I must confess that I don’t know what you are saying. I asked you directly whether you think what happened with HAP, Krugman, and R&R is unfair.
Let me give you what I hope is an easier question. Many commenters have pointed to the Colbert report, in which Colbert mocks and jeers at R&R mercilessly. I’ve not seen anyone mention however that Herndon, the “H” in HAP, appeared right after on the same show to help Colbert continue his mocking and jeering. I would think that any objective person would think that’s a sign that the HAP affair is a politically motivated witch hunt rather than a disagreement among scholars. Here’s my question: Do you think it’s ok for Herndon to present his “research” on the Colbert report?
Here is the youtube link:
http://www.youtube.com/watch?v=fATXeLPG3cE
Best to watch the first Colbert R&R segment, which some commenters have linked, and then the followup with Herndon to see the full impact.
Menzie,
I neglected to mention that I do have your book and have read it. So I understand that you advocate long-term fiscal responsibility.
I think you’ve succeeded in making some serious arguments accessible to the general public, which is pretty hard to do. I also think the book is very well-written and well-argued. You will not be surprised to learn that I disagree with a number of the book’s interpretations and conclusions. But I nonetheless think the book should be on the reading list of anyone who’s interested in the origins and aftermath of the crisis, regardless of what side of the debate you are on.
Most all of you are on one side of the isle or the other and can’t see the forest for the trees. You sound like a bunch of primary grade children.
How about global warming……er should we call it global climate change now???
Rick Stryker: I’m not sure I’ve ever read Krugman criticize Sargent of being irrelevant, or needing reconstruction. Rather, see here.
Afraid I haven’t watched the Colbert segment. I’ll just say life is often unfair on TV (like when my dissertation adviser was accused of being a Stalinist).
Thanks for the compliment on the book.
Quote from Rogoff’s “Letter to Paul Krugman”.
“Your desire to blame our later 2010 paper for the stances of some politicians fails to recognize a basic reality: We were out there endorsing very different policies. Anyone with experience in these matters knows that politicians may float a citation to an academic paper if it suits their purposes. But there are limits to how much policy traction they can get with this device when the paper’s authors are out offering very different policy conclusions. You can refer to the appendix to this letter for our views on policy through the financial crisis as they were stated publicly in real time. We were not silent.”
So I followed one of her appendices to find out how she was “not being silent”, especially with policy makers. Which led me to this quote describing a meeting Rogoff and Reinhart had with 40 senators:
(Excerpted from U.S. Senator Tom Coburn’s , “The Debt Bomb”)
“Senator Kent Conrad, D-N.D., the chairman of the Senate Budget Committee, then offered his own stern warning to the assembled senators. Turning around in his chair in the middle of the room, he explained to his colleagues that when our high debt burden causes our economy to slow by 1 point of GDP, as Reinhart and Rogoff estimate, that doesn’t slow our economy by 1 percent, but by 25 to 33 percent, because we are growing at only 3 or 4 percent per year.
Reinhart echoed Conrad’s point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, “If it was not risky to hit the 90 percent threshold, we would expect a higher incidence.”
So exactly how was Reinhart “endorsing very different policies”?