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Reinhart-Rogoff research has serious problems

edited April 2013 in Off-Topic
This research has been quoted in recent years and has been the basis of Government Policy like Austerity programs in Europe and also of Paul Ryan budget proposals and investor decisions. Unfortunately, for such an important research the data was not vetted properly.

When researchers have looked at the data and the Excel spreadsheet behind the research they found significant issues. They are summarized below for us non-economists:

There are 3 types of errors in the data:

* Selective Exclusions
* Unconventional Weighting
* Excel Sheet Coding Error

This is actually a big deal and why peer reviewing process is important. So, these errors combined that out the basis of 90% debt being the cut-off point of fiscal cliff. There is probably a cut-off but it is much less clear cut than it used to be. Meanwhile, the Austerity prescriptions should be re-reviewed and adjusted.


  • edited April 2013
    And there's additional commentary this week from The Economist: Article from The Economist
  • Reply to @Old_Joe: This sums it all:

    " Taken together, the authors of the new paper reckon that average post-war growth above the 90% threshold ought to have been reported at 2.2% rather than -0.1% (see chart)."

    This is a big error...
  • * Selective Exclusions
    * Unconventional Weighting
    * Excel Sheet Coding Error
    I hope this is an honest mistake, but I think not with all 3 mistakes in this seminal paper. Good for this graduate student who discovered these mistakes.
  • Reply to @Sven: I don't think these new revelations on the paper will make any difference on Political Economics. They are rather selective in making for political decisions for us anyway. So, new facts does not matter...
  • There are two other significant issues with R&R's work.

    As the Economist and others have pointed out, they committed a fundamental error of science in arguing that higher debt caused slower growth, whereas all their (misrepresented) data showed was a correlation between these variables. In fact, others have argued that the direction of causation was more likely to have been the reverse: that the case could more easily made that it was periods of slower growth that led to rising debt (e.g., that periods of higher unemployment or rising retirees lead to less tax revenue coupled with more government outlays).

    In addition, they argued that bond markets demand significantly higher interest rates when the debt-to-GDP ratio got too high. While this has been the case for countries that don't control their own currency (Think Greece and other euro-zone countries.), markets have taken an entirely different view of countries that issue their own currency and therefore which simply can't default. (Think Japan, with near zero rates while having a very high debt ratio.)

    What a shame when economists abandon science to play politics.
  • Reply to @Ginko: I agree with your observations. I just want to augment the 2nd paragraph that the higher interest rates were often observed in countries when they don't control their own currency or they issue debt in another currency. I add this second part because that was the case for a lot of developing world countries that issued dept denominated in dollars.

    US in particular controls its currency and only issues debt in its own currency. Japan is in similar situation. Most of the Japanese dept is in yen.
  • When have facts, science or the will of the people ever gotten in the way of politics? Show me the money!
  • Agree, Mark. Just like how the government turns backflips when it reports employment and CPI numbers. Unfortunately, much of the media swallow the pablum, even though they know it is skewed. And now the feds want to change how inflation is measured, again, so that social security can be made to look as if it has been fixed.
  • Reply to @Old_Joe:
    Thanks for the link. I learned something new - never saw the word "swingeing" before:-)

    Regarding cause and effect - the Economist suggests that while the original authors were not careful in mass media articles, they were more cautious in their "academic" papers. Maybe, but they stepped right up to the line by asking early in their paper: "what is the long run macroeconomic impact of higher levels of government debt?" Not significance, not implication, but impact - conveying a causal factor.

    In the conclusion to their paper, they write what suggests a preexisting bias:
    [W]e would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of “debt intolerance” in Reinhart, Rogoff, and Savastano (2003). As we argued in that paper, debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity analysis. A general result of our “debt intolerance” analysis, however, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs. Even countries that are committed to fully repaying their debts are forced to dramatically tighten fiscal policy in order to appearcredible to investors and thereby reduce risk premia. The link between indebtedness and the level and volatility of sovereign risk premia is an obvious topic ripe for revisiting in light of the more comprehensive cross-country data on government debt.
    One of the comments posted to the Economist's article even suggests that by encouraging governments to act on this 90% cliff, they are in fact creating the "debt intolerance" effect they have claimed to have discovered.

    Finally, it's worth remembering that correlation does not imply causation in either direction. There can be underlying (latent) factors that cause both effects being studied.
  • Reply to @BobC:

    This new method of calculating CPI, called "chained CPI", will not only lower SSI COLA increases, but many State and Municipal Pension that use SSI COLA increases in their claculation as well.

    The compounding effect of COLA increases on pension payments are this is one more way of deflating debt obligations...puts some chains on the CPI.

    Much of this came out of Simpson Bowles committee which was a bipartisan body of work. As others in Washington posture... Simpson Bowles quietly rolls out.

  • Reply to @bee: Nothing came out of the Simpson-Bowles committee which disbanded without issuing a report. People like to pretend that the Simpson-Bowles report was the "bipartisan" committee report but there was no agreement in the committee and no final report.
  • edited April 2013
    Reply to @Anna: Well, sort of yes and no. From Wickipedia:

    "The commission first met on April 27, 2010. [2] A report was released on December 1, 2010, [3] and although the Commission was supported by over 60% of the members (11 out of 18), [1] and an equal number of Democrats and Republicans, the report did not reach the 14-vote threshold required to formally endorse the blueprint and have it sent to Congress for approval." [4]

    The complete Wickipedia entry: National Commission on Fiscal Responsibility and Reform

    [1] "In a 11-7 Tally, the Fiscal Commission Falls Short on Votes - Interactive Feature". 2010-12-03. Retrieved 2012-12-01.

    [2] Agustino Fontevecchia (2012-04-18). "JPMorgan Chief Jamie Dimon Asks For Simpson-Bowles Now". Forbes. Retrieved 2012-12-01.

    [3] Lillis, Mike. "Pelosi flips, backs Bowles-Simpson plan she had called ‘simply unacceptable’ - The Hill's On The Money". Retrieved 2012-12-01.

    [4] Rowley, James (2012-10-04). "Deficit plan wins 11 of 18 votes; more than expected, but not enough to force action". Washington Post. Retrieved 2012-12-01.
  • Reply to @Old_Joe: And for those who prefer to listen to podcasts in the car there is a decent summary of the issue here: . In the podcast, the point is made that the original paper was not peer-reviewed. Of course, evidence is also offered that peer-reviewed journals have such errors as well.
  • msf
    edited April 2013
    Reply to @Old_Joe:
    Not just "a" report, but the "final" report was released on Dec 1, 2010:

    "On Wednesday, December 1, 2010, the National Commission on Fiscal Responsibility and Reform held its sixth public meeting to discuss the nation's mid- and long-term fiscal challenges. At the meeting, the Commission released its final report, The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform." (Embedded link to report in original:

    Perhaps worth noting is that an official vote may never have been taken. It was scheduled for Dec 3, 2010, and still listed as an "upcoming meeting".

    Edit - Yet there are declarations like this one from Andy Stern, asserting that there was a vote: "On December 3, 2010, I voted 'no' on the Simpson-Bowles report presented to the National Commission on Fiscal Responsibility and Reform."

    Edit - PBS/Need to Know also reporting that a vote was taken: "The committee vote taken on December 3, 2010 ..."

    (Various edits and changes go to show that I should check more thoroughly before carefully, thoughtfully, inserting my foot into my mouth.)

  • Reply to @msf: Good morning- I'm not sure that this needs all of the detailed hair-splitting that we-all have been engaging in... I was just curious when I saw Anna's comment, because it seemed to me that I had remembered (and agreed with) a number of details from that committee report (final, official or otherwise). So there evidently was a "final" report, but due to the usual hard-line politics, it was never officially endorsed by the required committee majority.
  • edited April 2013
    This issue was taken by Colbert Report. There is a funny prologue followed by second part interview with the Grad student that found the error.
  • Some great laughs there with Colbert, Investor. Thanks!
  • "Rogaine and Braveheart," Colbert's got your number!
  • Reply to @AndyJ: I saw that too... good laugh.
  • edited April 2013
    Reply to @msf: From the PBS/Need to Know article, the vote was taken, but it did not receive the required support to go directly to Congress:

    "That report needed to achieve a super majority (or the equivalent to 14 of the 18 members voting Yes) to move on to Congress for approval. The committee vote taken on December 3, 2010 resulted in only 11 “yes” votes. ...Without the requisite super majority within Simpson-Bowles, the committee’s report could not be presented to Congress for a vote."

    Not mentioned in practically any report on S-B (including PBS/Need to Know) is an alternative blueprint offered as part of the S-B deliberations that addressed the "deficit problem" in an entirely different way.

    References on that alternative:

  • Reply to @Old_Joe: "Between us, we cover all knowledge; he knows all that can be known, and I know the rest." ... Twain's reference was to Rudyard Kipling - but might well have been intended for msf. (-: (-:
  • Reply to @Investor: Crack me up! Very cool. Thanks for sharing Investor.
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