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One further thought on the Reinhart and Rogoff fracas
There is a genuine tension between becoming (and staying) “famous” and expressing all the appropriate levels of agnosticism on issues, which fairly often ought deserve quite an extreme agnosticism (see Mark Thoma on this). It is hard to do both, and you can see this tension in the writings of most if not all well-known economists, at least in their more public pronouncements. In the “good old days” that tension could be elided. Academic discourse took place at relatively closed seminars, no quick responses were required, word traveled slowly, back and forth was much less rapid, and in general transparency was lower all around.
I’ve seen the Reinhart and Rogoff book in airports around the world, even though it is to most people unreadable or at best boring. Could they have still made a splash if they had changed the title to This Time is Different: Why Inference from Macroeconomic Data is Really, Really Hard? I don’t think so.
Enter the internet and the blogosphere. Someone criticizes your work, in this case a body of work which has become very famous and made you very famous. Do you respond by trying to defend the “fameworthiness” of the work, in which case a gross “rightness” might suffice, or at the very least you will try to outline the defensibility of your position. Or do you respond by spelling out all of the reasons why one might be agnostic about a difficult issue?
I predict that most famous people will respond by trying to defend the fameworthiness of their work.
We as readers then respond by taking media which produce both fame and transparency — the internet and the economics blogosphere and Twitter — and suddenly wielding them as a weapon for transparency alone. Obviously something won’t look right. I don’t want to conclude “the fault is ours,” but it is still worth noting the tension between the mediums we patronize and what they are, to the broader world, actually good for. It’s as if you showed up to Justin Bieber’s birthday party and started complaining that not everyone in the room deserves to be there. They probably don’t, and their presence at the party should not cause you to overlook their shortcomings. Still, it’s also good to be self-aware about one’s own role in uttering such a complaint about the quality of the party.
If you are receiving any public recognition at all, choosing how to present your material is one of the most difficult decisions.
Justin Fox has very good related comments.
A more complete response from Reinhart and Rogoff
You can read it here, it is too long and the formatting is too complicated to reproduce in full on MR (which is what I ideally would like to do), so please do read it.
Reinhart and Rogoff respond
I knew something would come quickly, though this is quicker than I had expected. Via Matt Yglesias:
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
Addendum: Paul Krugman comments.
An update on the Reinhart and Rogoff critique and some observations
My previous post presented this:
Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon, Michael Ash, and Robert Pollin. I will read the paper soon.
I’ve now had some time to look at the paper, and here are a few observations:
1. I am of course open to publishing a rebuttal from R&R, but on a first read the authors make a strong case for their claim that the core Reinhart-Rogoff result — concerning the growth slowdown at debt at 90% of gdp — is based on a coding error and some data exclusion issues. Please reread my earlier post on “the smell test.”
2. That said, as Ray Lopez mentions, including in the data the postwar bouncebacks of some Anglo countries (NZ, Australia, and Canada), as recommended by the critics, is not obviously going to improve the quality of the answer. For instance the Kiwis have postwar growth rates of 7.7, 11.9, -9.9, and 10.8 percent, across the late 1940s. Are those numbers — which were combined with high postwar levels of debt — relevant to current fiscal policy issues? I say no, while admitting this may lead us to throw out other data points as well. I don’t know what is the non-cherry-pick answer here or if there even is one.
3. It is perhaps unfortunate in this age of the internet that rebuttals must be presented so quickly, but so be it. It will be interesting to hear from R&R.
4. Not too long ago I reread R&R to ascertain whether they actually present the 90% level as an emergency cliff of sorts. I concluded they did not, although there were some sentences that a reader could take out of context toward confirming such an interpretation.
5. In the paper by the critics, the pp.7-9 discussion of “weighting by country” vs. “weighting by country-year” is very interesting, but the fact that it matters as much as it does makes me more skeptical about the entire enterprise. Whether you should weight by population is important too.
6. I am seeing a large number of tweets which both misrepresent R&R or misrepresent their influence on current policies of “austerity.”
7. My own view, as you can read in The Great Stagnation, is that the primary mechanism is slow growth causing high debt/gdp ratios, not vice versa. In any case this is by far the most important issue, whether or not you agree with my take on it.
8. The “case for austerity” didn’t rest much on R&R in the first place, rather on the notion that the bills have to be paid, dawdling on adjustment is not always so easy, and the feasible sum of international redistribution is quite low. For this reason the UK should be relatively uninterested in immediate austerity and many nations in the eurozone periphery more interested.
9. In the blogosphere, the ratio of blog posts “attacking austerity” to “proposing constructive alternatives to austerity” is at least ten to one. That too tells you something. Many of the alternatives proposed would indeed pass a Benthamite cost-benefit test, at least if implemented as desired, but they are simply inconsistent with incentives and the relatively selfish nature of individual behavior.
10. The most interesting question to me is a rather squirrelly and subjective one: how should this episode change the relative ratios of what I read? Should I in fact read fewer quantitative economics papers, instead (at the margin, of course) preferring more narrative history? This is not the first time that an extremely influential major empirical result has been overturned or at least thrown into serious doubt.
Addendum: FT Alphaville weighs in. And Annie Lowrey is tweeting some responses from R&R.
A critique of Reinhart and Rogoff
Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon, Michael Ash, and Robert Pollin. I will read the paper soon.
Whither Keynesianism?
A second problem with the Keynesian recommendations is that governments did not do enough to build up surpluses in good times. Many governments therefore are running out of fiscal space, or at least markets perceive that to be the case. Even if Keynesian theory says they ought to be expanding with their fiscal policy, they can’t always do so with impunity.
The recent history of the UK government is a paradigmatic example. Under Prime Minister Liz Truss, the plan was to boost spending on energy subsidies and cut some taxes. Whatever else you might say about the details of those policies, they did fit the Keynesian recipe for fiscal expansion in tough times (though it is noteworthy that many leading Keynesian economists strongly opposed them).
The problem is that markets didn’t like the policies, and the British pound fell and borrowing rates on government bonds rose. Financial markets were roiled, and now the Truss days are over.
Now Rishi Sunak is prime minister. What exactly is he supposed to do? He might try the opposite of the Truss plan, namely raise some taxes and cut some spending, or at least bend downwards the trajectories for future spending. In Keynesian terms, however, that policy is ill-advised. The UK is likely entering a recession, and the Bank of England has declared it may be the longest recession on record. Is it really wise to engage in austerity when times are turning bad?
Furthermore, the extant numbers do not indicate that the UK has to engage in austerity. Its debt-to-GDP ratio is about 80%, which is not astronomical. For a while economists Carmen Reinhart and Kenneth Rogoff tried to convince the profession that debt levels are dangerously high at 90% of GDP, but those arguments were shot down for having data errors and now those claims are discredited. It is not easy to now argue that a debt-to-GDP of 80% requires austerity.
Here is the remainder of my Bloomberg column on the topic.
Is recovery always slow after a financial crisis?
That has been the received wisdom, but it is now challenged by a new paper (pdf) by Christina and David Romer:
This paper revisits the aftermath of financial crises in advanced countries in the decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967-2007. The series is based on narrative assessments of the health of countries’ financial systems that were made in real time; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable. We find little support for the conventional wisdom that the output declines following financial crises are uniformly large and long-lasting. Rather, the declines are highly variable, on average only moderate, and often temporary. One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself when distress is particularly extreme or continues for an extended period, the aftermath of a crisis is worse.
There is Justin Lahart coverage here, including a contrast with Reinhart and Rogoff.
“We all know that wealth inequality has gone up”
That is a response to the Piketty criticisms from Paul Krugman, and also mentioned by Matt Yglesias. Phiip Pilkington also has a useful treatment. This point however doesn’t do the trick as a defense. Keep in mind that the “new and improved numbers,” as produced by Chris Giles, are showing doubts about the course of measured wealth inequality in the UK. Maybe wealth inequality hasn’t gone up.
Now maybe that does “have to be wrong.” But if the “new and improved” numbers are wrong, it is hard to then argue Piketty’s wealth inequality numbers can be trusted. In which case we are back to knowing that income inequality has gone up, but not knowing so much concrete about wealth inequality. (That is one reason why my own Average is Over focuses on income, and on labor income in particular, because that is where the main action has been.) The data section of Piketty’s book, which has gathered so much praise, then is not so useful, though by no fault of Piketty’s. We might think it likely that wealth inequality has gone up, but if we are going to do these selective overrides of the best available data, we cannot trust the data so much period or otherwise cite it with authority. We also could not map wealth inequality into particular measures of the r vs. g gap at various periods of time.
If there is one big lesson of the FT/Piketty dust-up, it is that we don’t have reliable numbers on wealth inequality.
Now do we in fact “know” that wealth inequality has gone up? See this piece by Allison Schrager. Intuitions about wealth vs. income inequality are trickier than you might think. And on what we actually do and do not know, here is a very good comment on Mian and Sufi’s blog (for U.S. data):
Piketty update
…according to a Financial Times investigation, the rock-star French economist appears to have got his sums wrong.
The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.
The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.
Prof Piketty, 43, provides detailed sourcing for his estimates of wealth inequality in Europe and the US over the past 200 years. In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.
For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970. An independent specialist in measuring inequality shared the FT’s concerns.
The full FT story is here.
Addendum: Here is the in-depth discussion. Here is Piketty’s response.
Assorted links
1. Student debt in Sweden is high, even though school is free.
2. The normative force of the Leontief production function, as illustrated by one consumer in Japan.
3. Kotlikoff on Reinhart and Rogoff.
4. Asimov short story — “Sally” — on self-driving cars.
5. opscost.com now has added features, including that patients can share their hospital bills with others.
6. Technological advances in trains, and has Sarkozy ever tried alcohol? Carla says no.
Assorted links
A few remarks on the Oregon Medicaid study
There is a simple quotation from Josh Barro, who by the way has supported ACA. Josh wrote:
Despite efforts to spin it to the contrary, this is bad news for advocates of the Medicaid expansion. While Medicaid is clearly good for some things, it was supposed to be good for all of the measures tracked.
Or here is Ray Fisman:
Now that the clinical results have started to come in, it’s time for liberal media types like myself to eat some humble pie. Today’s New England Journal article presents a set of findings showing that Medicaid had no effect on a set of conditions where you would expect proper health management to make a difference. There are effective treatment protocols for hypertension, cholesterol, and diabetes, yet insurance status had no effect on blood pressure, cholesterol levels, or glycated hemoglobin (a measure of diabetic blood sugar control).
Do read the rest of those posts for a more complete picture of the results, but many commentators are overlooking these rather simple upshots.
The key question here is how we should marginally revise our beliefs, or perhaps should have revised them all along (the results of this study are not actually so surprising, given other work on the efficacy of health insurance). For instance should we revise health care policy toward greater emphasis on catastrophic care, or how about toward public health measures, or maybe cash transfers? (I would say all three.) One might even use this study to revise our views on what should be included in the ACA mandate, yet I haven’t heard a peep on that topic. I am instead seeing a lot of efforts to distract our attention toward other questions.
I am sometimes reluctant to speculate about motives, but I believe there is currently a fear of stating the actual truth, given that ACA and the Medicaid expansion are coming under increasing political fire, very often involving mistruths from the Republicans I might add.
You are seeing obfuscations of reality when you encounter two particular responses to the new Medicaid results, which I have been seeing with disturbing frequency. The first is something like “But you still buy health insurance, don’t you?” The second is when the debate is steered into showing that Medicaid does indeed benefit poor people (which is obviously true, and was so before and after this study).
Those are both examples of running away from the idea of thinking at the margin. A better response would run more along the lines of “The Medicaid expansion had been oversold, we now should think more along some other lines for improving our health care system. Let’s admit that we have more of a mess on our hands than we had realized or let on.” You don’t have to deny that Medicaid might help with long-term care problems, for instance, or advocate the abolition of Medicaid. The real results from the new study are most likely about health insurance and health care, not so much about Medicaid per se; see Ezra’s on-target remarks.
Compare what you have seen over the last two days with the writings on the earlier phases of the Oregon study, when it seemed to be yielding a more positive picture of Medicaid. Those earlier writings often were preparing for a coronation of this study (please do read that link) but now we are seeing hand-wringing and all sorts of talk about the study’s limitations.
For varying and useful perspectives, here are Carroll and Frakt and Megan McArdle.
Coming on the heels of the debate over Reinhart and Rogoff, I find this all sad. If there is any cheery lesson it is that, in relative terms, macroeconomics is in better shape than we had thought!
Assorted links
1. A new database on educational quality.
2. On the unreliability of early New Zealand gdp figures.
3. Claims about the economics of Game of Thrones.
4. Status competition among religions, as designed by the homeless.
5. There is now a journal for porn studies.
6. China gives Algeria an opera house.
7. Edward Hugh: what kind of test case will Japan prove to be?
A short history of economics at U. Mass Amherst
From Dylan Matthews. Here is an excerpt:
The tipping point, Wolff says, was the denial of tenure for Michael Best, a popular, left-leaning junior professor. “He had a lot of student support, and because it was the 1960s students were given to protest,” Wolff recalls. That, and unrelated personality tensions with the administration, inspired the mainstreamers to start leaving.
That created openings, which, in 1973, the administration started to fill in an extremely unorthodox way. They decided to hire a “radical package” of five professors: Wolff (then at the City College of New York), his frequent co-author and City College colleague Stephen Resnick, Harvard professor Samuel Bowles (who’d just been denied tenure at Harvard), Bowles’s Harvard colleague and frequent co-author Herbert Gintis, and Richard Edwards, a collaborator of Bowles and Gintis’s at Harvard and a newly minted PhD. All but Edwards got tenure on the spot.
…Under those five’s guidance, the department came to specialize in both Marxist economics and post-Keynesian economics, the latter of which presents itself as a truer successor to Keynes’s actual writings than mainstream Keynesians like Paul Samuelson. “When I got there, the department basically had three poles,” said Gerald Epstein, who arrived as a professor in 1987. “There was the postmodern Marxian group, which was Steve Resnick and Richard Wolff, and then there was a general radical economics group of Sam Bowles and Herb Gintis, and then a Keynesian/Marxian group. Jim Crotty was the leader of that group.” Suffice it to say, most mainstream departments have zero Marxists, period, let alone Keynesian/Marxist hybrids or postmodern Marxists.
Assorted links
1. 6,297 Chinese restaurants and hungry for more.
2. Article on Chwe and Jane Austen.
3. There is no great stagnation (plastic finger tripods for eating messy foods), and is this the first time I have linked to The Onion?
4. Predictions by Eric Schmidt and Jared Cohen. Tesla’s predictions for the 21st century.
5. On Hadji Murad.
6. Mankiw on Reinhart and Rogoff, and Ryan Avent on same, and now we are getting somewhere: “To me, the most interesting question is why it is so politically difficult to sustain appropriately accommodative monetary or fiscal policy.” Most of the current discourse on that latter and all-important question is of low quality.
I could not have said it better myself.