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As a rule, most things that academics argue most about among themselves tend to have very few or little real world consequences. At least, that’s the main insight of what has become known as Sayre’s Law, which states: “Academic politics is the most vicious and bitter form of politics, because the stakes are so low.”
But today, we have an exception to that rule in of the form of an academic debate that broke out very publicly within the past week, over one of the findings a very widely cited paper by Harvard researchers Kenneth Rogoff and Carmen Reinhart into the effects of high national debt levels upon national economic growth rates. Mike Konzcal describes the influence of the Rogoff-Reinhart research:
In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, “Growth in a Time of Debt.” Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.
This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Post editorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.”
Problems arose within the academic community however because other researchers weren’t able to fully replicate Reinhart and Rogoff’s results. At least until very recently, when Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst acquired a copy of the Excel spreadsheet that Reinhart and Rogoff used to develop their results from them, which allowed the UMass-Amherst researchers to review their analysis and to identify some issues with how it was done, which they published in a recently released paper. Konzcal explains:
They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.
San Diego State University’s James Hamilton has one of the better summaries of the issues with the data in dispute with respect to the full scope of the Reinhart and Rogoff paper:
The specific evidence reported in Reinhart-Rogoff (2010) came from three different data sets. First, they followed 20 individual countries for up to two centuries, calculating the average growth rate for that country in the years when debt levels exceeded 90% of GDP and average growth rates for years with other debt levels. They reported these separately for each individual country (see Table 1 of Reinhart and Rogoff (2010)), and found that growth rates were slower when debt levels were higher. Second, they combined data from a panel of 20 different emerging economies over 1970-2009 and found that growth rates were slower when debt levels were higher. The recent critique by Herndon, Ash, and Pollin (2013) did not discuss either of these first two claims. Instead, their critique concerns Reinhart and Rogoff’s analysis of a third data set, a panel of 20 advanced economies over the last half-century.
Let me first jump to the bottom line, and then review the details. Reinhart and Rogoff originally claimed that for this last of the three data sets, real growth rates were around 4% for low debt levels, 3% for moderate debt levels, and -0.1% or +1.6% for debt levels above 90%, with the latter difference depending on whether the aggregation was done using the mean or the median. Herndon, Ash, and Pollin claim that when the numbers are correctly tabulated, real growth rates are around 4% for low debt levels, 3% for moderate debt levels, and 2.2% for debt levels above 90%, with the latter inference based solely on the mean.
If, like us, your eyes have glazed over with the numbers and academic commentary at this point, let’s compare these two sets of results in conflict in graphical format:
The big point of debate is for national debt-to-income (GDP) ratios over 90%. Thanks mainly to an Excel spreadsheet coding error, Reinhart and Rogoff had erroneously found that average real economic growth rates for nations with high national debt loads were negative. After correcting for Reinhart and Rogoff’s data handling errors, Herndon, Ash and Pollin find that instead of being negative, average real economic growth rates for nations with high national debt loads are positive, but are a full percentage point lower than for nations that maintain lower national debt burdens.
And that’s what all the academic hubbub is about. What then gives this academic debate real world consequences is the degree to which a number of leftist organizations have seized upon the Excel programming errors in Reinhart and Rogoff’s third dataset to try to discredit all their findings as a way to undercut those seeking to bring government spending back down to get the size of the national debt under better control.
Which we note is a lot harder to do if real economic growth rates aren’t anywhere as near as strong as they could otherwise be because of an excessively high national debt burden.
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