Reinhart and Rogoff study based on flawed data:I pointed this out in 2010

It comes as no surprise to me that researchers at the University of Massachusetts at Amherst have published a study showing that the conclusions which Carmen Reinhart and Kenneth Rogoff drew about debt and economic growth were inappropriate and unjustified because of problems with their data and lack of clarity about causality. This has been reported in the Financial Times, the Wall Street Journal and the New York Times. Here is what I published about their study in February 2010 on my previous blog Harold Chorney Political Economist.

Wednesday, October 27, 2010

Misleading data on debts and growth

Feb. 17, 2010Kenneth Rogoff of Harvard and Prof. Carmen Reinhart
have a new paper out that purports to show rising indebtedness above 90 % of the GDP impedes the rate of economic growth by 1 %. But the paper is less than convincing. In the first place in the developed world of advanced capitalism the number of data points of countries where debt levels exceed 90 %   for any prolonged period of time are rather limited. They have a large set of data over many years but most of it is for lower debt levels and much of it for less developed countries where a lot else is going on with respect to economic growth than simply public sector debt.But in addition there is a bigger problem with their analysis as it is presented and commented upon by Martin Wolf in the FT today. There is no discussion of causality. There may well be a correlation between slower growth and rising debt beyond 90 % of the GDP but which causes which ?

Almost always , particularly in monetarist policy oriented central banks interest rates are raised before a recession sets in. So slower growth is no surprise . It is a result of interest rate rise induced recession. Given the slower growth, debt levels inevitably rise because that is how the fiscal system of the advanced western countries is designed.There is no surprise here. But the cure to these higher debt levels is the restoration of growth and lower unemployment. So Rogoff and Reinhart because they do not, at least in the version of the paper that is posted on line(a link is provided in Martin Wolf’s column in the FT on walking the fiscal tightrope), discuss this issue of causation have not demonstrated the conclusions they claim.

Rather than some arbitrary policy rule about debt to GDP, I prefer the following formulation which I have written about in the past. Responsible fiscal policy budgeting entails separating out investments in human capital and other capital account expenditures from the current expenditure budget, lowering the rate of unemployment to a consensually arrived at target range(below 5 % for the U.S. and Canada, ensuring that infrastructure is on a sustainable path through appropriate investment in it, and then and only then balance the current expenditure budget.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in business cycles, deficit hysteria, deficits and debt, Uncategorized, unemployment and tagged , , . Bookmark the permalink.

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