Commentary: No Virginia, There is No Santa Claus

Commentary: No Virginia, There is No Santa Claus

04/19/2013 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

What do you do when you find out Santa Claus doesn’t exist?

That’s the situation former vice presidential candidate/House Budget Committee Chair/potential presidential candidate Rep. Paul Ryan (R-Wisconsin) faces now that the study which provided him with the academic support for budget cuts (aimed principally at so-called entitlements) has been undermined.

Harvard economists Carmen M. Reinhart and Kenneth Rogoff in 2010 published a research paper which held that for countries with debt loads equivalent to or greater than 90 percent of annual economic output, “median growth rates fall by 1 percent, and average growth falls considerably more.”

That study gave ammunition to Ryan and company, who used it repeatedly to press for deep deficit-cutting reductions in the federal budget—cuts aimed squarely at Social Security, Medicare and other programs that enjoy high levels of public support, the “third rail” of American politics. It would have been next to impossible to win political support for cuts to these programs on the merits—recall the “keep-your-government-hands-off-my-Medicare” banners—if deficit-hawk politicians had not been able to cite the findings from Reinhart and Rogoff to bolster their case.

Now it turns out, Reinhart and Rogoff were wrong. They stand accused of making a major data error, leaving one country out of their calculations and using “unconventional weighting of summary statistics,” according to three economists at the University of Massachusetts at Amherst.

Thomas Herndon, Michael Ash and Robert Pollin of UMass-Amherst, tried to replicate the Reinhart-Rogoff results and found some simple miscalculations or data exclusions that changed the ultimate results. When they re-ran the numbers, they found “the average real G.D.P. growth rate for countries carrying a public debt-to-G.D.P. ratio of over 90 percent is actually 2.2 percent, not -0.1 percent,” as Reinhart-Rogoff contended. In other words, heavy debt did not cause our economic downturn.

What they found specifically was a coding error in the Reinhart-Rogoff analysis that caused the first five countries in the alphabet to be omitted in computing average debt and growth rates. They discovered as well that New Zealand was inexplicably left out of some calculations, and some data elements were inexplicably weighted differently than others.

Reinhart and Rogoff admitted the error, sort of. Yes, they said correcting the report for the errors found by Herndon, Ash and Pollin affect the average growth rate, but contended the median growth rate still shows the correct “order or magnitude,” supporting their overall thesis.

The controversy erupted in the same week in which the International Monetary Fund warned the United States and Great Britain against budget cuts and austerity programs.

One of the points at issue is a chicken-egg problem: Do high levels of debt cause slow growth or does slow growth—the response to which is often heavier government spending—cause higher levels of debt?

The UMass-Amherst/Harvard feud is big news in economic circles since academic papers rarely receive the attention, say, of Kim Kardashian’s pregnancy or Lindsay Lohan’s latest escapade. The unraveling of the anti-debt argument has some economists wondering how many decisions were forced because of Reinhart-Rogoff.

“The Reinhart and Rogoff paper was not used only to argue for cuts to popular social insurance programs, it was also used to argue against government efforts to boost the economy and create jobs,” according to Dean Baker, an economist and co-director of the progressive Center for Economic and Policy Research. “The opponents of these policies argued that efforts to spur the economy would prove to be counterproductive because Reinhart and Rogoff showed us that higher debt levels would mean slower growth.”

For their part, Reinhart and Rogoff stand by their work but fall back on a common ploy, suggesting the matter be studied further.

“Herndon, Ash and Pollin have written a useful paper, finding a significant mistake in one of our figures, and helped reconcile why one result is out of line with all the other results in our original paper as well as ones presented in our later research, not to mention those they present in their helpful comment,” Reinhart and Rogoff said in a written response. “Clearly more research is needed on debt and growth and we welcome all efforts, it is very exciting area. We now have debt data for a larger number of countries than the original sample and long time periods that allows this research to press forward.”

What’s next? The Easter Bunny?

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