Reinhart and Rogoff had done an enormously influential
analysis showing that countries experienced sharply slower growth once
their debt-to-GDP ratio exceeded 90 percent. With the United States and
many European countries reaching debt-to-GDP ratios in this 90 percent
range in the wake of the Great Recession, Reinhart and Rogoff's work was
seen as a warning. It was taken as evidence that governments would have
to reduce spending, raise taxes or both to get or stay below the 90
percent threshold.
Political leaders and central bankers around the world were happy to trumpet the Reinhart-Rogoff findings. The story was that cutting deficits may slow growth in the short term and seriously hurt those directly affected by the cuts, such as laid-off government workers, but it was essential medicine for sustaining a healthy economy.
The spreadsheet error uncovered by Herndon and analyzed in a paper co-authored with two University of Massachusetts professors, Michael Ash and Robert Pollin, showed that the Reinhart and Rogoff story not only was based on an embarrassing gaffe but also was not true. Working off the spreadsheet that Reinhart and Rogoff created, Ash and Pollin showed there was no 90 percent cliff. Reinhart and Rogoff's red line depended on the spreadsheet error and a peculiar way of aggregating growth rates across countries.
If the numbers were entered correctly and added up across countries with more typical methods, growth did not fall off steeply for debt levels above 90 percent. The data still associated higher debt levels and lower growth rates, but the sharpest reduction in growth rates occurred with debt levels below 30 percent. That was a very different story from what Reinhart and Rogoff were saying publicly and presumably also in private meetings with central bankers, finance ministers and members of Congress.
Perhaps even more important, a number of new studies looked at the direction of causation between growth and debt. While Reinhart and Rogoff never directly tested for causation, they certainly implied that high debt causes slow growth.
When two prominent economists can make a major error on work that had a huge impact on economic policy and face no real consequences, it says a great deal about the incentives in the economics profession.
[...]
Political leaders and central bankers around the world were happy to trumpet the Reinhart-Rogoff findings. The story was that cutting deficits may slow growth in the short term and seriously hurt those directly affected by the cuts, such as laid-off government workers, but it was essential medicine for sustaining a healthy economy.
The spreadsheet error uncovered by Herndon and analyzed in a paper co-authored with two University of Massachusetts professors, Michael Ash and Robert Pollin, showed that the Reinhart and Rogoff story not only was based on an embarrassing gaffe but also was not true. Working off the spreadsheet that Reinhart and Rogoff created, Ash and Pollin showed there was no 90 percent cliff. Reinhart and Rogoff's red line depended on the spreadsheet error and a peculiar way of aggregating growth rates across countries.
If the numbers were entered correctly and added up across countries with more typical methods, growth did not fall off steeply for debt levels above 90 percent. The data still associated higher debt levels and lower growth rates, but the sharpest reduction in growth rates occurred with debt levels below 30 percent. That was a very different story from what Reinhart and Rogoff were saying publicly and presumably also in private meetings with central bankers, finance ministers and members of Congress.
Perhaps even more important, a number of new studies looked at the direction of causation between growth and debt. While Reinhart and Rogoff never directly tested for causation, they certainly implied that high debt causes slow growth.
When two prominent economists can make a major error on work that had a huge impact on economic policy and face no real consequences, it says a great deal about the incentives in the economics profession.
[...]
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