Mark Gongloff — 2 More [UMKC] Grad Students Claim To Find Another Flaw In Reinhart-Rogoff Research

Woo hoo!

First, University of Massachusetts-Amherst grad student Thomas Herndon shot holes in their influential research paper, "Growth In A Time Of Debt," by pointing out several mistakes and omissions the Harvard economists had made. Now, two PhD students at the University of Missouri-Kansas City have a new paper that they say finds another flaw in that same research.

The students argue that Reinhart and Rogoff's paper leaned too heavily on data from one country, Japan, leading to all sorts of bad conclusions about the relationship between government debt and economic growth.

"The argument that high ratios of government debt-to-GDP cause low growth remains plagued by misconceptions, at least for nations which issue their own currency," wrote the UMKC students, Matthew Berg and Brian Hartley. They used the same data that Herndon used, correcting for Reinhart and Rogoff's earlier errors and omissions.

Berg and Hartley argued that, once you adjust for the outsize influence of Japan on the data, there is no evidence that high debt causes slow growth, as Reinhart and Rogoff strongly suggested in their original paper and in subsequent influential op-ed pieces. In fact, there is some evidence that the chain of events may work in the other direction, with slow growth leading to higher debt, Berg and Hartley wrote.

The Huffington Post
2 More [UMKC] Grad Students Claim To Find Another Flaw In Reinhart-Rogoff Research
Mark Gongloff

Randy Wray — The Absolutely Final and Definitive Destruction of Reinhart And Rogoff

Two UMKC students have provided what I think is the most destructive empirical work to date on the simply awful book and articles by Reinhart and Rogoff that purported to find a magical debt ratio beyond which economic growth plummets to negative territory. They are Matthew Berg and Brian Hartley and their piece is at New Economic Perspectives:

Before presenting a quick summary of their findings, let me make two preliminary notes. First they validate what Yeva Nersisyan and I first pointed out three years ago: the crappy empirical research of Reinhart and Rogoff was driven by a small number of outliers, and by confusion of causation and correlation. Yes, some countries–Japan most notably–have high debt ratios and slow growth. R&R aggregated in such a way as to give very high weights to those countries. And those countries had high deficits and thus high accumulated debts because growth was low. Hence, there was never any support for their claim that 90% marks a causal turning point.

Economonitor — Great Leap Forward
The Absolutely Final and Definitive Destruction of Reinhart And Rogoff
L. Randall Wray | Professor of Economics, UMKC

Randy's definitive statement on MMT and the claim that MMT says deficits don't matter. 

But note that no UMKC-affiliated faculty member (and probably no student) has ever said something as silly as “no deficit can be bad”. I do not even know what that could mean. Deficits can be bad. Very bad. Very very bad. A sovereign country that issues its own currency cannot be forced into involuntary default so long as it floats its currency. That is certainly a true statement–accepted by anyone who knows anything about sovereign currencies. Whether it is talmudic I have no idea. If you’ve got the magic porridge pot, you can provide the porridge.

Can too much porridge be bad? You betcha–just read the damned story. Inflation? Yes. Currency depreciation? Probably. Leave too few resources for the private purpose? No doubt. Create a nation of couch potatoes? You’ve got it. Bury everything under a thick layer of suffocating porridge? Read the story.

Where do people like Epstein get this stuff? I have no idea.

Art Shipman on Reinhart-Rogoff. What about private debt?

More on Reinhart & Rogoff. What about private debt?

Read the first post below before the second. They go together.

Art nails it.

The New Arthurian
Other Things Equal

How can you even know if it's not a problem?
The Arthurian

Salvatore Babones — Exploding the Debt Threshold Myth

"Lies, damned lies and statistics.''

Truthout | Op-Ed

Exploding the Debt Threshold Myth
Salvatore Babones | senior lecturer in sociology and social policy at the University of Sydney in Australia and an associate fellow at the Institute for Policy Studies (IPS) in Washington, DC

Dylan Matthews — Inside the offbeat economics department that debunked Reinhart-Rogoff

It’s easy to overestimate the differences between UMass and more mainstream departments. The empirical microeconomics Dube does is not too different from what David Card, David Autor, Raj Chetty, and other macroeconomists in more mainstream departments do. Pollin helped the Department of Energy implement the green portions of the stimulus, which was designed initially by mainstreamers like Larry Summers. And even the “left Keynesians” of Amherst don’t go as far as some of their peers at, say, the University of Missouri – Kansas City in dismissing the possibility of high deficits leading to inflation later on.

“It’s almost a talmudic claim that since no country with its own currency can go bankrupt, no deficit can be bad,” Epstein says. “They’ve made important contributions, and a lot of them are my friends, but we try to look at things more critically and not assume there are absolutes.”

But the department’s radical openness to alternate perspectives still sets it apart. “Learn from Marx, learn from Keynes, learn from Hayek,” Pollin says. “One of the biggest influences on me personally was Milton Friedman. He was very engaged with real world questions, and he made no bones about his ideological predilections.”

The Washington Post — Wonkblog

Inside the offbeat economics department that debunked Reinhart-Rogoff
Dylan Matthews

I'll be the first to say it: The debt doesn't matter at all...at any level.

Thomas Herndon is the grad student over at UMass Amherst who co-wrote the paper refuting the results of Reinhart/Rogoff. He's the David compared to the mainstream academics' Reinhart-Rogoff Goliath, right?

Well, maybe not so fast.

Today Herndon wrote a piece in Business Insider where he rebuts RR's claim that their result was essentially the same as his.

But then he said this:

"There is not one word in our paper which suggests that a high level of government indebtedness is never a problem. It would be absurd to think that governments never have to worry about their level of indebtedness. The aim of our paper was much more narrowly focused. We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth."

With that comment he may have just resurrected Reinhart/Rogoff and the entire austerity movement. That's because they're gonna say, as long as you feel that debt can be a problem, why wait for it to become a problem? Why not just keep it low all the time or better yet, eliminate it completely?

This is EXACTLY the argument that is continuously employed so ineffectively by people like Paul Krugman. It's also the argument used by every single member of the Democratic Party, including Obama. By agreeing to the false belief that debt is a problem they open up a huge hole that the Austerians can drive a truck through. From there, they're simply able to frame themselves as the grown-ups; the people who represent fiscal responsibility.

The fact is, debt in and of itself is never a problem (as long as we're talking about a fiat money system), it's merely a choice. By allowing debt to rise you may risk inflation at some point. That's a choice. On the other hand keeping debt low or eliminating it via austerity or fixing the quantity of money via a gold standard or some regime of convertibility means deflation. That's also a choice.

Why is deflation (and high unemployment), the current choice, better than inflation? I say it's not. Why do we treat it as the "grown up" way to address this supposed problem?

As long as we keep agreeing to the Austerians' assertions about debt, at whatever threshold, we lose the debate, pure and simple.

The fact is, the discussion should not be about debt at all. The level of debt is irrelevant in a fiat money system. We should be talking about jobs, standard of living and the general welfare of the citizens in our society and we should be doing whatever it is we need to do, within our physical and intellectual constraints to achieve that. That means people, brains, energy, water, land and air, etc.

To hell with the the debt! Stop saying it matters, no matter what level. It doesn't.

Merijn Knibbe — The Reinhart and Rogoff defense of their work is riddled with mistakes, too

Economists are proud of their advanced mathematical and quantitative methods. The already classic Herndon, Ash and Pollin paper however pointed out mayor flaws and mistakes in basic arithmetic in the influential work of Reinhart and Rogoff on the relation between debt and growth.

Mistakes with ’non-trivial’ implications for their conclusions and present economic policy. Reinhart and Rogoff responded to this – but to an extent this response only made matters worse, see also this Krugman blogpost. As is also pointed out in a new response by Ash (which we can publish here courtesy of the German Handelsblatt), who shows that the Reinhart and Rogoff defense (see below) crucially misquotes and misrepresents their own work.

Real-World Economics Review Blog
The Reinhart and Rogoff defense of their work is riddled with mistakes, too
Merijn Knibbe

Lynn Stuart Parramore — Meet the 28-year-old Student Who Exposed Two Harvard Professors Whose Shoddy Research Drove Global Austerity

Marshall Auerback gets a shout out for being one of the first to call out R & R, along with INET's Thomas Ferguson and Robert Johnson.

AlterNet

Meet the 28-year-old Student Who Exposed Two Harvard Professors Whose Shoddy Research Drove Global Austerity
Lynn Stuart Parramore

Watch me take apart Reinhart and Rogoff, deceitful, lying, manipulative, self-serving scum