The Magazine

It Just Gets More and More Dismal

Caution: economists at work.

May 6, 2013, Vol. 18, No. 32 • By ANDREW FERGUSON
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We moralize with numbers these days, under the guise of disinterested science. The only institution we trust any longer to discover the truth—excuse me, the “truth”—is science, even “social sciences” like economics and psychology and sociology that are sciences in name only. This is what happens when a nation’s intellectual class—excuse me, its “thought leaders”—no longer feel comfortable discussing questions with reference to traditional ethics or moral intuition, much less natural law or, God help us, God. 

Gary Locke

Gary Locke

Consider the fate suffered in recent weeks by a pair of well-known economists, poor Carmen Reinhart and Kenneth Rogoff, both of Harvard. They are the authors of several scholarly papers, slightly fewer newspaper op-eds, and one big-selling book, This Time Is Different, which aim to prove scientifically that too much debt is bad for you. More precisely—and how could they be scientists if they weren’t precise?—they claim to have discovered that when a government’s debt rises to 90 percent of its country’s gross domestic product, the country’s economy contracts by (on average) one-tenth of one percent per year. This is what masses of historical data from 44 countries around the world show. Really. You could look it up. “Our approach here is decidedly empirical,” they wrote.

Reinhart and Rogoff (RR, as they have come to be known) called this 90 percent figure a threshold—not necessarily a point of no return, but a point beyond which GDP dropped like a plumb. A few too many years at or past the threshold and a government’s appetite for debt would do lasting damage. As it happens, the United States’ debt-GDP ratio is more than 100 percent. Gulp.

RR published their finding in a scholarly paper in 2010, and the 90 percent threshold became a kind of cultural artifact. It captured the post-financial-crisis zeitgeist the way a pop song or a movie or a bestelling novel can summarize the mood of a particular place or time. The financial crisis, which almost no economist foresaw, and the weak economic recovery, which nearly every economist expected to be stronger than it is, have given policymakers a bad case of the jumps, so for an explanation of our present parlous position they have turned to—who else?—economists. By focusing everyone’s attention on a government’s debt load, RR helped inspire the austerity measures that have been enacted throughout the eurozone. Paul Ryan, the chairman of the House Budget Committee, cited them in making the case for the budget cuts outlined in his booklet “Path to Prosperity.” A presentation by RR serves as the dramatic centerpiece of Debt Bomb, a book by Tom Coburn, one of the Senate’s most insistent budget scolds. The Washington Post editorial page, which occasionally affects the cut-the-crap severity of a true budget hawk, has taken the RR threshold as a proven fact, airily referring here and there to “the 90 percent mark that economists regard as a threat to sustainable economic growth.”

That’s a treacherous phrase, economists regard. Economists do not speak with a single voice; indeed, their tedious and endless disputations are one way they convince themselves they’re practicing science. The green-eyeshades of the World Bank and the International Monetary Fund gazed with horror at RR’s finding, but more partisan liberal economists dismissed RR’s obsession with debt as a magic key to our economic fortunes, obsessing instead over their own magic keys—higher government spending, higher government borrowing, and higher taxes on rich people. Few challenged RR on methodological grounds until this April, when three economists—informally called HAP, an acronym of their last names—released a paper debunking the idea of a threshold. Fondling the same sets of figures that RR had used, HAP found that RR had neglected to include some important historical data in their calculations. When those figures were factored in, the threshold vanished. On the graphs, GDP no longer dropped like a plumb after the debt-to-GDP ratio reached 90 percent. 

HAP had other beefs with the way RR reached their conclusions, including a glaring transcription error on one of their spreadsheets. Just in case anyone missed the tendentious purpose of their own research, HAP closed their paper like so: “RR’s findings have served as an intellectual bulwark in support of austerity politics. The fact that RR’s findings are wrong should therefore lead us to reassess the austerity agenda itself in both Europe and the United States.” Let the word go forth: Par-TAY!

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