Daily Archives: April 17, 2013

Chris Cook

Carmen Reinhart and Ken Rogoff have had a bad day. The two economic historians’ research, which implied that public debt overhangs can hamper economic growth, was perhaps one of the most cited pieces of work in recent years. Their advice that high debt-GDP ratios – particularly above 90 per cent – are harmful to growth, has become a widely used point in discussion. And it’s under attack by a trio at the University of Massachusetts, Amherst – Thomas Herndon, Michael Ash, and Robert Pollin.

As FT Alphaville has noted, the issue is about one of Reinhart and Rogoff’s most heavily cited papers on the importance of debt. This paper has been accused of being the victim of fat-fingered Excel coding, as well as selective use of data and odd weighting of how different episodes are weighted, which seemed – to the authors – to make little sense. [UPDATE, 14:46 GMT - Pollin and Ash have written a piece for the FT on what they think this all means for austerity here.]

Robin Harding posted Reinhart and Rogoff’s original reply here. Overnight, the authors have worked through the numbers – and have put up a pretty robust defence of their work. They do admit the first error – there was an Excel blunder:

…Herndon, Ash and Pollin accurately point out the coding error that omits several countries from the averages in figure 2. Full stop. HAP are on point. The authors show our accidental omission has a fairly marginal effect on the 0-90% buckets in figure 2. However, it leads to a notable change in the average growth rate for the over 90% debt group.

They are, however, resisting the second issue – the selective use of data.

HAP go on to note some other missing debt data points, which they describe as “selective omissions”. This charge, which permeates through their paper, is one we object to in the strongest terms. The “gaps” are explained by the fact there were still gaps in our public data debt set at the time of this paper.

They also defend the weightings:

Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities

And they stand by their conclusions.

So do where does this leave matters on debt and growth? Do Herndon et al. get dramatically different results on the relatively short post war sample they focus on? Not really. They, too, find lower growth associated with periods when debt is over 90 per cent. Put differently, growth at high debt levels is a little more than half of the growth rate at the lowest levels of debt.

To address that point, here are some tables from Prof Reinhart showing the difference between their work in the American Economic Review in 2010 and the debunking, using data from 1945 to 2009. The new research shows some linkage between debt and growth.

Reinhart & Rogoff Herndon, Ash & Pollin
Debt/GDP Mean Median Mean Median
<30 4.1 4.2 4.2 NA
30-60 2.8 3.9 3.1 NA
60-90 2.8 2.9 3.2 NA
>90 -0.1 1.6 2.2 NA

She enclosed another table, with a longer timespan, back to 1800:

Reinhart & Rogoff Herndon, Ash & Pollin
Debt/GDP Mean Median Mean Median
<30 3.7 3.9 NA NA
30-60 3 3.1 NA NA
60-90 3.4 2.8 NA NA
>90 1.7 1.9 NA NA

Prof Reinhart also pointed out that an article of theirs, published in the Journal of Economic Perspectives in 2012, found countries with a debt ratio of below 90 per cent had average growth rates of 3.5 per cent – compared to 2.4 per cent for those above 90 per cent – for 1800 to 2011.

Their full response is below the fold. Read more