Reinhart-Rogoff Austerity Study Controversy

Annie Lowrey's story today covers the controversy surrounding a main pillar of the pro-austerity camp, the Reinhart-Rogoff study that asserts a connection between high levels of debt and low growth. Economists from the University of Massachusetts at Amherst have written a paper that spotlights basic errors in the computation of the underlying data that Reinhart and Rogoff use to draw their conclusion. Here's how Yves Smith put it in her excellent post from last night on naked capitalism, "Linchpin Pro-Austerity Paper Rife with Errors; Recomputed Results Show No Growth Hit from High Government Debt":

There appears to be no intellectually honest defense of austerity left standing.

The IMF has already ‘fessed up that it does not work in practice, that cutting government spending when growth is weak simply leads the economy to contract further, making debt to GDP levels even worse than before. That admission was based on the miserable results it has produced when implemented.

But now, a new paper by Thomas Herndon, Michael Ash and Robert Pollin of PERI, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” is a devastating takedown of the factoid commonly bandied about by austerians, that if government debt rises above 90% of GDP, growth suffers. That belief in turn was based on a paper “Growth in the Time of Debt” by Carmen Reinhardt and Kenneth Rogoff, which did a 20 country comparison from 1946 to 2009. This paper claimed that when debt rose over the scary 90% to GDP level, growth fell to -0.1%.

Turns out that is not true. A number of economists had challenged the findings for asserting causality when all it showed was a correlation. In addition, a number of economists tried replicating the Reinhart-Rogoff results for years, with no success. Reinhardt and Rogoff refused to share their underlying computations. Five years later, now that the Reinhart/Rogoff work is widely accepted as true, they finally sent their “working spreadsheet” to the PERI team. As Herndon, Ash, and Pollin report:

Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not −0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

While Lowrey's piece leaves unmentioned the possibility that rather than innocent error data sculpting might be the issue here, it's hard not to draw that conclusion.