Carmen Reinhart and Ken Rogoff, used their second NYT column in a week, to complain about how they are being treated. Their complaint deserves tears from crocodiles everywhere. They try to present themselves as ivory tower economists who cannot possibly be blamed for the ways in which their work has been used to justify public policy, specifically as a rationale to cut government programs and raise taxes, measures that lead to unemployment in a downturn.
This portrayal is disingenuous in the extreme. Reinhart and Rogoff surely are aware of how their work has been used. They have also encouraged this use in public writings and talks. While it is unfortunate that they have "received hate-filled, even threatening, e-mail messages," as one who works in the lower-paid corners of policy debates, let me say, welcome to the club.
This column is careful to halfway walk back the main claim of their famous paper, telling us:
"Our view has always been that causality [between high debt levels and slow growth] runs in both directions, and that there is no rule that applies across all times and places."
It is good to hear the reference to causation from slow growth to high debt and that "no rule applies across all times and places." However it is worth noting that Reinhart and Rogoff never felt the need to use their access to the NYT's opinion pages to correct all the politicians who used their paper to argue the exact opposite: that their paper implied that countries with high debt levels could anticipate long periods of slow growth.
In addition to misleading the public about the role their work has played in policy debates, they also are not quite straight about two strictly factual points. The first sentence begins by referring to the publication of their article in May of 2010. This might lead readers to believe that this is when their claims about high debt slowing growth first began to affect public debate on stimulus and deficits.
This is not right as I know since my first e-mail requesting their data was written in January of 2010. In fact, their work first made a splash in international debates when they put out a version of this article as a National Bureau of Economic Research working paper in January, 2010. Their findings were already widely known by the time the paper was published in May, 2010.
The other point on which they mislead readers is the claim:
"Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon."
Actually, their 2010 paper found that growth was 2.9 percentage points lower in countries with debt to GDP ratios above 90 percent than in the group with debt to GDP ratios in the 60-90 percent range as we can see in this nice chart from Robert Samuelson's column yesterday.
|Debt/GDP||Annual economic growth, 1945-2009|
Source: Robert Samuelson.
People in policy debates would rightly view the prospect of annual growth slowing by 2.9 percentage points as being a very serious matter. That would imply a country with a debt rising above the 90 percent threshold would have an economy that is one-third smaller after a decade as a result of its high debt level. That is a very serious decline in living standards. If this sort of falloff in growth was a predictable result of letting the debt to GDP ratio rise about the 90 percent threshold, then policymakers would certainly be justified in taking strong measures to reduce deficits.
On the other hand, the 1.0 percentage point falloff they find in their corrected data would not come close to prompting the same reaction, especially since "causality runs in both directions." The falloff they find in their corrected data is not even close to being statistically significant.
Furthermore, in their corrected data, the sharpest falloff in growth occurs at much lower debt-to-GDP ratios. If Reinhart and Rogoff were making policy recommendations based on what their data actually show they would be telling countries to maintain very low debt levels, in the range of 15-20 percent of GDP. Since they have never highlighted this point, one might reasonably question the extent to which their policy recommendations relate to their research.
One final point deserves mention in this discussion. Debt is one side of a balance sheet. Countries have assets. The United States government owns tens of trillions of dollars of land, mineral rights, fishing rights, broadcast frequencies and other assets that could in principle be sold. In most cases there are good reasons not to sell these assets. However if we really believed that high debt levels horribly hobbled growth, then it would likely be worth selling off some of these assets.
Suppose we believed the original Reinhart-Rogoff 2.9 percentage point growth falloff number. If our debt-to-GDP ratio were at 100 percent of GDP, we could sell off $3.2 trillion in assets to bring the debt-to-GDP ratio down to a safe 80 percent level. This would lead to a growth dividend of more than $28 trillion over the next decade. In other words, we would be able to pocket more than 8 times the market value of these assets in the form of added growth, and that is just over the first decade.
To my knowledge no one in public debate, including Reinhart and Rogoff, have advocated this sort of massive asset sale. Yet the payoff of more than 8 to 1, has to swamp the benefits from almost any other public policy imaginable. This seems pretty compelling evidence that no one really believes that high debt levels actually lead to slow growth.
In other words, this is a fig leaf. Reinhart and Rogoff's work is a cover for political actors who do not want to take steps to boost the economy and lower the unemployment rate and who want to cut programs like Social Security and Medicare. It is not part of a honest policy debate.