Carmen Reinhart and Kenneth Rogoff have emailed a response to today's criticisms of their research on debt and growth. As I predicted, the criticisms change nothing. To sidestep this debate for a moment, I would note in particular that the entire debate completely fails to acknowledge the main flaw in the R&R research. As they themselves acknowledge in the response, the empirical correlation that we're arguing about is completely irrelevant to the policy debate at hand. They write that "we are very careful in all our papers to speak of 'association' and not 'causality.' " This genuinely ought to settle the debate. Nothing Reinhart and Rogoff present, under any interpretation or any methodology offers any reason to believe that a high debt:GDP ratio causes slow growth. Yet much political rhetoric, including some from Reinhart and Rogoff themselves, presents their work as offering important policy guidance.
It's great that when challenged they retreat to the more defensible claim that their work is actually irrelevant, but many policymakers and pundits seem to feel otherwise.
Full text of their response below:
We literally just received this draft comment, and will review it in due course. On a cursory look, it seems that that Herndon Ash and Pollen also find lower growth when debt is over 90% (they find 0-30 debt/GDP, 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; 90-120, 2.4% and over 120, 1.6%). These results are, in fact, of a similar order of magnitude to the detailed country by country results we present in table 1 of the AER paper, and to the median results in Figure 2. And they are similar to estimates in much of the large and growing literature, including our own attached August 2012 Journal of Economic Perspectives paper (joint with Vincent Reinhart) . However, these strong similarities are not what these authors choose to emphasize.
2012 JEP paper largely anticipates and addresses any concerns about aggregation (the main bone of conention here), The JEP paper not only provides individual country averages (as we already featured in Table 1 of the 2010 AER paper) but it goes further and provide episode by episode averages. Not surprisingly, the results are broadly similar to our original 2010 AER table 1 averages and to the median results that also figure prominently. It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign.
The JEP paper with Vincent Reinhart looks at all public debt overhang episodes for advanced countries in our database, dating back to 1800. The overall average result shows that public debt overhang episodes (over 90% GDP for five years or more) are associated with 1.2% lower growth as compared to growth when debt is under 90%. (We also include in our tables the small number of shorter episodes.) Note that because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.
By the way, we are very careful in all our papers to speak of "association" and not "causality" since of course our 2009 book THIS TIME IS DIFFERENT showed that debt explodes in the immediate aftermath of financial crises. This is why we restrict attention to longer debt overhang periods in the JEP paper., though as noted there are only a very limited number of short ones. Moreover, we have generally emphasized the 1% differential median result in all our discussions and subsequent writing, precisely to be understated and cautious , and also in recognition of the results in our core Table 1 (AER paper).
Lastly, our 2012 JEP paper cites papers from the BIS, IMF and OECD (among others) which virtually all find very similar conclusions to original findings, albeit with slight differences in threshold, and many nuances of alternative interpretation.. These later papers, by they way, use a variety of methodologies for dealing with non-linearity and also for trying to determine causation. Of course much further research is needed as the data we developed and is being used in these studies is new. Nevertheless, the weight of the evidence to date -including this latest comment -- seems entirely consistent with our original interpretation of the data in our 2010 AER paper.
Carmen Reinhart and Kenneth Rogoff
April 16, 2013