Debt and growth

An open letter to Paul Krugman can be found here and here (pdf). May 25, 2013.

Response to Critics about Content

April 26, 2013

In May 2010, we published an academic paper, “Growth in a Time of Debt” in the American Economic Review. Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels about of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with lower rates of growth.

On April 15, 2013, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. They also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics .

We promptly admitted the errors and responded in the print edition of the New York Times on April 26, 2013. Also see our supporting technical material on the NYT's webpage.

The Reinhart and Rogoff Response to Critics about Intent: Debt, Growth, and Reality

Carmen Reinhart and Kenneth Rogoff, Harvard University
April 30, 2013

Our papers on public debt and growth, which came after our 2009 book, explore the long-term secular growth consequences of very high public debt.1 This work does not advocate macroeconomic austerity in the face of a deep financial crisis. Indeed, those papers would not have been released by the National Bureau of Economic Research had they made a policy prescription of any kind.

In other venues, we both supported aggressive monetary and fiscal stimulus to counteract the crisis. We were out front discussing sharing losses through write-downs of debt, such as on senior bank and sovereign obligations, instead of unconditional bailouts.

"The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery." Those are not our exact words. The quote comes from Federal Reserve Chairman Ben Bernanke earlier this year. This has always anchored our policy advice, an anchoring in reality informed by history and scholarship.

We publicly supported the bipartisan Simpson-Bowles proposals to reform fiscal policy and to stabilize debt over the longer term. We still do. We are proud of the help we gave the bipartisan commission by testifying because we firmly believe that the only viable solution to our problems is to be found at the center of the spectrum. Others disagree. Our democracy empowers this freedom of views but it does not give license to distort facts.

As to the facts, scholars understand that our 2010 paper on debt and growth in the Papers and Proceedings of the American Economic Review was a snapshot of our research program. Another take on the topic was published in 2012 in the Journal of Economic Perspectives (with Vincent Reinhart). The newer and much more complete paper incorporates more refined and more complete historical data going back to 1800. It improves the methods and ideas of our first effort and comes to the same general conclusion as the 2010 paper. To cite the earlier one and not the later is retrograde in research.

Both papers use our original debt/GDP database that has been available online in convenient and thoroughly documented form for over two years on our data website. Before that, they were posted on Carmen Reinhart’s University of Maryland website. The data have been downloaded by scores of scholars, including University of Massachusetts researchers, who graciously acknowledge us. Where clarification or other issues have arisen from the posted data, we have answered countless email inquiries from scholars and students over the past few years. We have done this in as timely a manner as the overwhelming demand permitted. We regard highly visible and public claims that we have not shared these data as slanderous.

1 For a short tour of some of our scholarly contributions on the topic since publication of the book, see the working papers of the National Bureau of Economic Research numbered 15639, 15795, 16168, 16334, 16893, and 18015.

Reinhart and Rogoff: Selected interviews, op-eds and media on the policy response to crisis

What should we do about national debt, and when? By Kevin G. Hall and Robert A. Rankin | McClatchy Newspapers Tuesday August 17, 2010

“Two prominent economists who published an acclaimed study last year of 800 years of national financial crises, "This Time Is Different," see flaws on both sides of today's argument. The debt must be dealt with, they say, but not too fast.”

Paul Krugman NY Times August 18, 2010 (Citing from McClatchy article) “Rogoff: We may need another stimulus bill just to decompress from the previous one, a smaller one to cushion the landing. Reinhart: I’m not one of those deficit hawks. … I’m not saying you run out and pull the plug and have an adjustment that could derail what fragile recovery we do have. Good for them. “

Top Culprit in the Financial Crisis: Human Nature. Barrons. November 24, 2012 by Lawrence C Strauss
Reinhart: …the thrust in a deep financial crisis, when you throw in both monetary and fiscal stimulus, is to come up with something that helps raise the floor. That's why the decline wasn't 10% or 12%. However, one area where policy really has left a bit to be desired is that both in the U.S. and in Europe, we have embraced forbearance. Delaying debt write-downs and delaying marking to market is not particularly conducive to speeding up deleveraging and recovery.
Rogoff: if you didn't just raise taxes or cut taxes but actually fixed the tax system, that would be very important ….And, lastly, other things, like infrastructure and education spending, are important. This isn't all about austerity versus no austerity. Countries that are successful in dealing with these crises, such as Sweden, sometimes take them as an opportunity to change. We haven't.

Reinhart Testimony before Senate Budget Committee, February 9, 2010 “In light of the likelihood of continued weak consumption in the U.S. and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. To be sure, this is not the time to exit. It is, however, the time to lay out a credible plan for a future exit.”

In Praise of Carmen Reinhart, Guardian April 2, 2010 (editorial page)
“The world's best known female economist has warned cutting the deficit the Tory way would send the UK back into recession.”

5 Myths about the European debt crisis, by Carmen Reinhart and Vincent Reinhart, Washington Post, May 9, 2010
Myth #3 Fiscal austerity will solve Europe's debt difficulties
But fiscal austerity usually doesn't pay off quickly. A large and sudden contraction in government spending is almost sure to shrink economic activity as well. This means tax collections fall and unemployment and welfare benefits rise, undermining efforts to reduce the deficit. Even if new borrowing is reduced or eliminated, it takes time to whittle down a large debt, and international investors are notoriously impatient.

Reinhart on Financial Repression to Deal with a Debt Overhang Bloomberg View, March 11, 2012

One of the main goals of financial repression is to keep nominal interest rates lower than would otherwise prevail. This effect, other things being equal, reduces governments’ interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates and reduces or liquidates existing debts, it is a transfer from creditors (savers) to borrowers and, in some cases, governments.

IMF Calls for Action on Eurozone BBC Newshour July 19, 2011 (interview with Kenneth Rogoff) “The current strategy that calls for years of austerity and recession in the periphery countries is just not tenable.”

The Euro’s Pig-Headed Masters, (Kenneth Rogoff, Project Syndicate, June 2011) Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions.”

October 21, 2012 The Economy and the Candidates Wall Street Journal Report with Maria Bartiromo (interview with Kenneth Rogoff)
Min 2:40 on Fiscal Cliff “Hopefully we won’t commit economic suicide by actually putting in all that tightening so quickly.” I like to see something like Simpson Bowles ---If we did, we could have our cake and eat it too, we could have more revenue without hurting growth.”

Kenneth Rogoff on Economy, European Debt Crisis. Bloomberg, Surveillance. July 27, 2012 Interviewer Tom Keene: “You told me five years and change ago that we would need four trillion dollars of stimulus to get through this” min: “7:55 yes to great infrastructure projects, but not to just digging ditches”

Financial Times August 8, 2011 “The Bullets Yet to Be Fired” (by Kenneth Rogoff)
In the case of Europe, this involves very large debt writedowns in the smaller periphery countries, combined with a German guarantee of central government debt in the rest. …..In the case of the US, policymakers need to offer schemes to write down underwater mortgages… there is still the option of trying to achieve some modest deleveraging through moderate inflation of say 4 to 6 per cent for several years.. …..Last but not least, monetary and financial solutions must be buttressed by structural reforms

August 12, 2011 Farheed Zakaria GPS “Krugman calls for Space Aliens to Fix US Economy” Ken Rogoff: Infrastructure spending, if it were well-spent, that's great. I'm all for that. I'd borrow for that, assuming we're not paying Boston Big Dig kind of prices for the infrastructure.

Interview with Charlie Rose, BusinessWeek, December 2012 CR: Does this economy need further stimulus? KR: … Certainly, withdrawing it at too rapid a rate in such a fragile economy makes no sense… We need to have areas where we spend money, like infrastructure, education.”

Inflation is Now the Lesser Evil Kenneth Rogoff, Project Syndicate December 2008 “It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass.”

Errata on "Growth in a Time of Debt"

Carmen Reinhart and Kenneth Rogoff, Harvard University
May 6, 2013

Our correction to our 2010 paper is available here and here.

A note on New Zealand data

April 27, 2013
Poring over the time series we used in late 2009 for RR (2010) "Growth in A Time of Debt", it became apparent that the New Zealand GDP data used has an error. It is off by a year. The source of the problem on New Zealand is the original Maddison data. This has propagated over time.
The Total Economy Database at the Conference Board now updates the Maddison data and still has the error, at least as late as April 27, 2013. I have notified the Conference Board of the error.
Note that this does not affect the Journal of Economics Perspectives paper on "Debt Overhangs", where the data for the 1861-1979 comes from the New Zealand Statistics Office. Post 1980, the data comes from the International Monetary Fund.