Carmen Reinhart and Kenneth Rogoff are a pair of world-renowned economists who, in 2010, published a study on the effects of high levels of national external debt on economic growth. This study, which found that countries experienced slower growth when their debt-to-GDP ratios exceeded 90 percent, has been key in the creation of a platform for austerity during the last three years, particularly in the United States and European Union.
Two weeks ago, however, a trio of graduate students, Thomas Herndon, Michael Ash, and Robert Pollin, blew a hole in all of it with a paper showing that Reinhart and Rogoff (hereafter, RR) had made crucial mistakes in their use of data in Microsoft Excel, eliminating advanced economies with high debt and high growth from their analysis. Commentators who have reviewed the paper anew also assert that RR formed their 90 percent benchmark as an arbitrary cut-off that means little for individual countries. The austerity duo admitted their Excel error, but have defended their central findings.
But the consequences of austerity have been disastrous. Unemployment in Greece has continued to rise as governments have slashed social spending programs in order to meet requirements for billions in bailout funds from the troika of the EU, European Central Bank (ECB), and International Monetary Fund (IMF). Meanwhile, conditions worsen without relent in Spain, France, and Italy. And here in the U.S., things aren’t going so well either.
Growth in the first quarter of 2013 came in at 2.5 percent, which is faster than was the case during much of 2012, but is still quite a bit slower than the 3 percent commonly cited as necessary for our economy to support a labor force that expands as quickly as the population. Though much of the federal government’s cutbacks have so far been confined to the military sector, state and local governments have already spent the recession cutting over half a million jobs and trimming programs; this makes the $85 billion in sequestration cuts taking effect just this year all the more pervasive, particularly as the vacuum left by the expiration of the Social Security payroll tax dampens hiring.
Put simply, austerity does not work. We learned this was true in 1937 and 1938, when cuts in federal spending contributed to a recession during the recovery from th e Great Depression. But the Keynesian lesson that huge recessionary gaps in demand must be filled by temporary deficit spending has been lost on modern policymakers.
The Obama Administration’s 2009 stimulus was a valiant attempt to fill the chasm opened up in 2007 and 2008, but insider accounts have told us that White House leaders knew their bill provided for too little spending (perhaps too little by half), and nonetheless limited their expectations because they could not rely on Congress to pass what was necessary. As Hulk might say, “CASUAL FAMILIARITY WITH ORIGINAL RESULT” was just not convincing enough.
Herndon, in an interview he gave to New York Magazine, stated that he got the RR data directly from Reinhart herself: “I clicked on cell L51, and saw that they had only averaged rows 30 through 44, instead of rows 30 through 49.” This is certainly an egregious error, and it is incredible that this was not discovered sometime in the past three years. Some of the charges against RR are compelling, though perhaps not entirely warranted. Herndon and his partners have also accused RR of “selective exclusion of available data” and “unconventional weighting of summary statistics.”
Having written only a couple of undergrad economics research papers, my authority here is almost non-existent, but I can concur with RR in their defense (“Reinhart and Rogoff: Responding to Our Critics” The New York Times 04.25.13) that outlier data must sometimes be eliminated in order to prevent trends from being skewed.
Moreover, in the past two weeks, RR have been civil and given appropriate weight to the conversation that has erupted around this issue. “Doing archival research involves making constant judgments and yes, on occasion, mistakes,” they wrote on April 25, “Learning from them is how science advances. We hope that we and others can learn from ours.” They also take care to show that the differences between their newest, more thorough analysis and Herndon’s new work are not vast—a 2.3 percent average growth rate for 90 percent-plus countries in RR’s 2012 paper, versus a 2.2 percent growth rate in Herndon’s.
But RR have definitely shown that they give insufficient weight to their impact on economic discourse when they pass the buck to others for “trumpet[ing our] paper as a fundamental reassessment of the literature on debt and growth.”
Sure, it was not a reassessment, but it was a valuable piece of ammunition. Several U.S. congressmen, including Rep. Paul Ryan (R-WI), America’s foremost champion for austerity, cited it in the run-up to the 2011 U.S. debt ceiling crisis, whose adverse effects we continue to feel. Like it or not, Reinhart and Rogoff have helped to shift the global economic dialogue further to the right, at a time when doing so is most harmful.
Herndon, Ash & Pollin have given us a fantastic example of what it means, as professors here at Vassar exhort us all to do, to “go to the source.” This is especially valuable in such an uncertain field as economics, where the only real experiments must be done in real time, at the potential expense of countless livelihoods. According to Scientific American, physicists at CERN only confirm their results to the public (see: the revelation of the Higgs boson) when they attain five-sigma certainty—which means there’s a 1 in 3.5 million chance that their data is not a statistical fluke.
Of course, economics will never be able to enjoy that sort of precision. The work of comparing countries to each other and across eras is fraught with pitfalls. Sometimes the task seems tantamount to determining New England’s rainfall in July by looking at Jupiter’s Great Red Spot. By its nature, economics will always be a blunt instrument. Therefore we must make sure that it is used carefully and skeptically, so that it is kept from smashing our world to pieces.
—Lane Kisonak ’13 is a Political Science major. He is the outgoing Opinions Editor of The Miscellany News.