Battle of the econ pundits
Policymakers need a dose of humility when analyzing the relation between debt and growth.


Harvard Professor and Economist Kenneth Rogoff speaks during the Sohn Investment Conference in New York, May 16, 2012. Rogoff and research partner Prof. Carmen Reinhart, have been subjected to withering invective after new findings suggest their warnings about the collapse of economies with high debt-to-GDP ratios are inaccurate.

Article Highlights

  • Economics isn’t science, not like chemistry or physics. It’s hard to run controlled economic experiments.

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  • It's no surprise that the relationship between debt and economic growth is a knotty one.

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  • Life is complicated, which is why markets often succeed spectacularly where top-down planning fails miserably.

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Water boils at 212 degrees, a fact that everyone learns in grammar-school science class if not earlier at home. There is a minor complication: Water boils at different temperatures depending on the atmospheric pressure; its boiling point is lower at higher elevations and vice versa. But once you know the altitude, a precise boiling point can be quickly determined by anyone. There’s an app for that.

Economics isn’t science, at least not like chemistry or physics. It’s hard to run controlled economic experiments. The behavior of people is a lot tougher to analyze and predict than that of water molecules; linkages and casual relationships aren’t so clear-cut. And efforts to apply scientific methods to the world of economics and finance can yield disappointing results, as all those science-minded analysts who worked on Wall Street during the financial crisis would (or at least should) attest.

So it really should be no surprise that the relationship between two important economic variables, debt and economic growth, is a knotty one. A 2010 study linking higher government debt to slower growth — one cited frequently by debt hawks in the U.S. and Europe — is now under dispute and its authors, Carmen Reinhart and Kenneth Rogoff, have been subjected to withering invective. The Harvard duo’s original research found that economic growth collapses at debt-to-GDP levels above 90 percent. But a trio of University of Massachusetts academics now counter that Reinhart and Rogoff are “wrong” and that their work is flawed by “selective exclusion of available data and unconventional weighting of summary statistics that inaccurately represent the relationship between public debt and GDP growth.” Oh, and the Reinhart-Rogoff paper also has an embarrassing Excel-spreadsheet error.

Reinhart and Rogoff cop to some of these charges and deny others, while maintaining that their research continues to show historical episodes of higher debt associated with a “quite large” cumulative impact on growth. But which way does the causality run? Does the linkage between debt and growth vary depending on other economic variables such as a nation’s ability to borrow in its own currency? And what if that debt fuels higher levels of government spending? Good questions — but politicians and pundits looking to quickly turn academic research into talking points aren’t likely to ask them.

And don’t think for a second that policymakers or academics wishing to become “policy entrepreneurs” in the mold of John Maynard Keynes have learned any humility or nuance. In a Financial Times op-ed laying out their case against Reinhart and Rogoff, two of those UMass economists, Robert Pollin and Michael Ash, make this categorical and unsubstantiated claim: “Government deficit spending, pursued judiciously, remains the single most effective tool we have to fight against mass unemployment caused by severe recessions.”

Really? Many economists would argue that monetary policy provides the better tools for dealing with economic shocks. And not to create a simplistic false equivalence, but it is worth noting that there are conflicting studies on the impact and efficacy of fiscal stimulus and a wide range of estimates for spending and tax-cut multipliers.

For instance: The Congressional Budget Office estimates that in 2012, the American Recovery and Reinvestment Act raised real GDP by between 0.1 percent and 0.8 percent and increased the number of people employed by between 0.2 million and 1.1 million: kind of a wide range. Also, as economist Russell Roberts of the Hoover Institution frequently says, good luck teasing out the precise, multiyear impact of an $800 billion stimulus package on a $16 trillion economy when at the same time the Federal Reserve is engaging in experimental monetary policy, Congress is implementing massive regulatory overhauls of the finance and health sectors, and revolutionary innovations in technology are reshaping U.S. energy production.

One more thing: When the econ pundits are all done slicing and dicing Reinhart and Rogoff, maybe they can turn their analytical gaze to fave liberal economists Peter Diamond, Thomas Piketty, and Emmanuel Saez. Their research — typically presented without counter by the media — into inequality (it is skyrocketing) and taxation (it should skyrocket) forms much of the support for progressive claims that America’s three-decade pro-market tilt has failed.

In short, life is complicated, which is why markets often succeed spectacularly where top-down planning fails miserably. In his Nobel speech, Friedrich Hayek paraphrased 16th-century Spanish scholars who taught that something’s “price depended on so many particular circumstances that it could never be known to man but was known only to God.” And the proper response by policymakers to this reality is neither policy paralysis nor knee-jerk calls for Son of Stimulus nor demands for an immediate balanced budget — but caution and humility. That’s the big lesson to be drawn from the Reinhart-Rogoff imbroglio. That, and to always double-check your math.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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