A Fateful Mistake

PARIS – Controversy is essential to the advancement of science. So the debunking of methodological flaws and a coding error in a paper by the economists Carmen Reinhart and Kenneth Rogoff is just part of everyday life in academia. Yet coverage of the controversy by the news media and the blogosphere has been astonishingly intense – and simplistic.

“Growth in a Time of Debt,” the short 2010 paper in which Reinhart and Rogoff claimed that public debt starts to have a significantly detrimental effect on economic growth once it reaches 90% of GDP, was never a celebrated piece of economic research. As a rough empirical characterization of stylized facts, it was received somewhat skeptically by the academic community, and both authors were known for much more noted contributions. Google Scholar, the academic search engine, records more than 3,000 academic citations of Rogoff’s most cited paper, compared to less than 500 for “Growth in a Time of Debt.”

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What would have normally remained a subject for post-seminar small talk has, however, become a topic for discussion by journalists, commentators, and policymakers. For all of them, what matters is that the sorry fate of the Reinhart/Rogoff paper undermines the case for fiscal austerity.

A few months ago, Olivier Blanchard, the International Monetary Fund’s chief economist, had already criticized his colleagues and policymakers in advanced countries for systematically underestimating the recessionary impact of fiscal consolidation programs. The debacle of the Reinhart/Rogoff paper is widely regarded as another, fatal illustration of austerity’s shaky intellectual foundations.

But this is only partly true. Until the Reinhart/Rogoff paper, the main argument for fiscal retrenchment rested on concerns about the sustainability of public debt. The question was whether a sovereign would ultimately be able to repay its debt, given specific economic and financial conditions, long-term trends such as the aging of the population, and uncertainty about the future course of policy.

The problem was that economists were unable to say how much is too much. There was no given threshold below which debt was innocuous and above which it was dangerous. So the message to policymakers was confusing. Economists were like doctors telling patients that, while some wine may be beneficial, too much is certainly dangerous – without being able to tell them how many glasses per day they were allowed. They were right, but hopelessly imprecise.

Confusion was especially acute in early 2010, when “Growth in a Time of Debt” was published. The global economy was just emerging from the deepest recession in the post-World War II period. A global Keynesian stimulus had prevented the worst, and the most urgent policy question was whether to continue supporting the economy or start consolidating.

Some argued in favor of delaying consolidation, because the economy was still in a deep recession; too harsh an adjustment, according to this view, would have a major impact on a still-weak private economy. Some claimed the opposite, arguing that, given the scale of the task, there was no time to lose.

The Reinhart/Rogoff paper appeared to provide the perfect argument in support of rapid consolidation, which is why it was cited intensively in policy discussions. Austerity, it was argued, was needed to stem the rise in the debt ratio and safeguard long-term growth.

To be sure, retrenchment could entail some short-term costs; but the longer-term benefits would be much bigger. Even though Reinhart and Rogoff themselves did not draw that conclusion explicitly in their paper, many drew it for them. It was so tempting for a minister or a senior technocrat to explain that consolidation had to start immediately, because the 90% threshold was approaching, that most of them did not resist it.

Heavy reliance on what turns out to be disputed evidence now leaves the fiscal hawks in a weak position, to say the least, vis-à-vis their opponents. This is especially true in Europe. Having promised that rapid consolidation would be good for growth, and having delivered recession, the European Union has disappointed its citizens. Adjustment fatigue is setting in, and governments risk losing support if they go much further in their consolidation efforts.

The danger is that the discrediting of hasty austerity could undermine the case for fiscal responsibility in the long run. If so, financial markets could conclude that public-debt sustainability is in serious danger – a perception that could have highly adverse effects on financing conditions. In the end, growth would indeed suffer, ironically proving Reinhart and Rogoff right.

This episode once again underscores the importance of intellectual rigor. Of course, that is not always an easy credo by which to abide. Researchers are tempted by persuasive results that can attract the interest of policymakers, who are tempted by a selective reading of the evidence that can provide them with ammunition in domestic and international debate. Submitting to either temptation, as the Reinhart/Rogoff episode has shown, is never advisable.

The views expressed here are the author's own.