Paul Krugman Needs to Lay Off the Rogoff-Reinhart Work on Debt Levels
Paul Krugman has done yeoman's work in exposing the myths behind the need for austerity in response to the Great Recession. But he has gone over the top with recent attacks on work by Carmen Reinhart and Kenneth Rogoff.
The R-R paper, "Growth in a Time of Debt," has gotten wide attention in the media and academic circles, and for good reason. Rogoff is a former chief economist of the IMF and Harvard professor, while Reinhart is a crackerjack economist at the University of Maryland with extensive experience on Wall Street. And, they compiled a massive data set to see what they could find about the relationship between high (or higher) debt levels and economic growth -- a pretty timely topic. They concluded, with a data set that covered 40 countries, that the debt-GDP ratio of 90 percent offers some guidance that a financial crisis is in the offing.
Krugman, from the perch of his NYT blog, don't like that. "Completely discredited," he fumes. Neither did John Irons and Josh Bivens of the Economic Policy Institute, who wrote a take-down of Reinhart and Rogoff that makes substantially the same points as Krugman.
The core grip involves the allegedly limited data set that R-R use. Krugman points out that the main episode of 90+ percent debt in the United States was after WWII, which obviates the data's utility, so skewed is it by the postwar demobilization that took the wind out of a war economy's sails. Ergo, Krugman says on his blog, you cannot say that 90 percent is a meaningful number.
This is off base for two reasons:
1. R-R compiled a massive data set of 44 countries so they could make some generalizations across national boundaries. At no point do they argue that the US data alone would make the 90 percent number compelling. Or, as Reinhart put it to me over the phone: "If you want to diagnose the disease, you don't draw your inference from a single patient."
2. R-R state explicitly in their paper that "debt thresholds are importantly country-specific." That's economist-talk for "the US can pull off a higher debt ratio than Greece." Indeed, Reinhart's previous research looked at "debt intolerance," a concept designed to sift out the countries that can handle higher debt loads. So even R-R admit the 90 percent number might not be relevant for the United States specifically.
What's really at work here is that Krugman does not like the political use to which the Reinhart-Rogoff paper could be put. And it's impossible not to have some sympathy for that. The Bible, the Koran, and Krugman's beloved Keynes all have in common that ill-willed people have misused their words, sometimes dreadfully so.
Misguided deficit hawks might grab the 90 percent number and use it as a cudgel to argue for deficit reduction in the United States now -- it's a nice, wrong bumper sticker. But in this case, Krugman ought to shoot the messengers who misuse the message, not the ones who penned the missive in the first place.
Image from AComment via Flickr
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