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!

Liberal economics writers agreed. “This is huge,” wrote one in the online magazine Slate. Another, called Dean Baker, suggested that RR’s hands were red with the blood—or at least the pink slips—of unemployed Europeans. Baker began his article in the Guardian with the question “How much unemployment did Reinhart and Rogoff’s arithmetic mistake cause?” His causal chain went like this: RR caused policymakers to worry about debt, the worry led them to impose austerity measures like spending cuts, and spending cuts caused unemployment to rise above 20 percent in Greece and Spain. “This is a mistake that has had enormous consequences.”

RR, Baker summed up, had tried to prove “that high ratios of debt to GDP lead to long periods of slow growth.” In fact, he continued, “the correct numbers tell a very different story.”

In fact, though, they don’t. HAP’s recalculations of RR’s data eliminate the dramatic drop-off in growth rates at the 90 percent ratio. But they also show an unmistakable drift toward slower growth as the debt ratio rises. Countries with up to 30 percent debt-to-GDP ratio, according to HAP’s paper, average 4.2 percent growth; growth falls to 3.1 percent at a 60 percent ratio. Growth increases to 3.2 percent as the ratio reaches 90 percent. After 90 percent, growth averages 2.2 percent.

In other words, by the time a debt ratio rises above 90 percent of GDP, growth will be cut roughly in half—according to HAP’s own calculations. High debt-GDP ratios, once they take hold in a country, tend to last for 15 years or more. An annual loss of 2 percentage points in growth over such a sustained period really starts to add up: A country will be significantly poorer than if it had kept debt under control.

This is why RR, acknowledging the spreadsheet and data errors with the appropriate amount of self-flagellation, seemed relatively undisturbed by HAP’s attempted debunking. “We do not,” they said in a statement, “believe this regrettable slip affects in any significant way the central message of [our] paper.”

By now, though, laymen who follow the RR-HAP controversy will have begun to have doubts about the whole enterprise. One thing that economists do agree on is the power of their elaborate, science-like calculations to describe and predict reality. It is this conceit, clung to by economists right and left, that is undercut by what liberal economists have come to call “the RR scandal.”

The scandal, if that’s the word, goes beyond simple negligence or incompetence or the injection of ideology into science. Problems with RR’s conclusions were plain from the start—so plain indeed that no highly trained economist could see them. For all their mounds of data—“data on forty-four countries spanning about two hundred years”!—only a handful of countries in RR’s set of numbers crossed the 90 percent threshold for any significant length of time; these provide a tiny sample from which to draw sweeping conclusions about how any given country will react under a similar debt load. And as for those mounds: It seems highly unlikely that statistics collected from dozens of sources about scores of countries over hundreds of years will yield reliable data that can be usefully compared across borders and epochs, especially when what’s being measured are such squishy concepts as “public debt” and “gross domestic product.” 

And RR made no distinctions between kinds of debt or their varying effects on growth. Not all debt works the same way. Money borrowed to build roads and bridges has enduring benefits that help an economy grow; money borrowed to invest in Solyndra .  .  . doesn’t. RR can’t tell us which countries had which kind of debt during which periods. 

Finally, there are the graphs themselves. The HAP graph shows a long slow decline in GDP under heavier and heavier debt loads. RR shows a dramatic drop at the threshold. The HAP graph is inherently more plausible precisely because RR’s is so dramatic. Cataclysms are rare in life; it’s why they’re so cataclysmic. Predictable cataclysms that happen on a regular schedule are even rarer. RR’s graph shows countries meandering along until .  .  . WHOMP! The HAP graph shows countries meandering along until .  .  . they keep meandering along, en route to more meandering along. Which is a more accurate picture of life? 

Meanwhile our scientific economists are fiercely debating the issue of causality in RR’s finding. Granted that debt and growth are somehow related, does high debt lead to slow growth, as RR suggest (but never explicitly assert), or does slow growth result in high debt, as HAP suggests? Only an economist could fail to see that causality, in this situation as in all others, probably goes both ways, waxing here and waning there, commingled with dozens of causal factors beyond “public debt” and “GDP” that an economist could never control for. The economy that economists study is an artificial scheme imposed on the actions of tens of millions of actors—315 million of them in the case of the United States, not to mention the several billion others who daily do one thing or another that will have consequences far beyond their own borders. 

This supposedly data-driven argument about causality and debt and growth is really an argument about values—values that dare not speak their name: ideology and beliefs about what’s right and wrong, about the proper way for people and their governments to behave. When RR speak of their paper’s “message,” and HAP conclude their paper by encouraging governments to end austerity and start borrowing, the game is up. Deep down, I suppose, RR think debt is bad; HAP think you can’t have enough of the stuff. But no one in our intellectual class wants to argue such a question on moral grounds. Pretending it’s science makes us feel so much better.

Andrew Ferguson is a senior editor at The Weekly Standard.


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