The Reinhart-Rogoff Rally

In the current issue of the New York Review of Books, Paul Krugman explains “How the Case for Austerity Has Crumbled,” focusing at length on the infamous Reinhart-Rogoff 90% debt-to-GDP threshold, and how it became a sort of banner, especially in the US and Europe, for the worldwide austerity caucus. Aside from some quibbles, I don’t have much to criticize in Krugman’s treatment, though I am puzzled by his Figure 1, showing, insofar as I can understand it, that government spending increased sharply in 2008 and tapered off thereafter. But Krugman asserts:

[A]fter a brief surge in 2009, government spending began falling in both Europe and the United States.

In his Figure 1 (reproduced below), Krugman identifies his zero year as 2007 (“zero year is the before global recession (2007 in the current slump) and spending is compared with its level in that base year.”) But government spending equals 100 in year -1 and increases sharply in year 0. So his figure indicates that spending increased in 2008 not 2009. It therefore seems to me that the horizontal axis in Figure 1 was mislabeled.


The 90% debt-to-GDP threshold was derived from a paper, “Growth in Time of Debt,” by Reinhart and Rogoff. After other researches had repeatedly failed to replicate its results, Thomas Herndon, Michael Ash, and Robert Polin identified a coding error, missing data, and an unconventional weighting of summary statistics by Reinhart and Rogoff, the three together accounting for the existence of the otherwise inexplicable 90% threshold in the paper.

Despite several attempts Reinhart and Rogoff to minimize the misleading implications of their paper, the 90% threshold, which never had any theoretical credibility, is now thoroughly discredited; any citation of  it as authoritative would rightly invite scorn and ridicule.

Krugman comments:

At this point, then, austerity economics is in a very bad way. Its predictions have proved utterly wrong; its founding academic documents haven’t just lost their canonized status, they’ve become the objects of much ridicule. But as I’ve pointed out, none of this (except that Excel error) should have come as a surprise: basic macroeconomics should have told everyone to expect what did, in fact, happen, and the papers that have now fallen into disrepute were obviously flawed from the start.

What has not yet been commented on as far as I know is the extent to which the discrediting of the Reinhart-Rogoff 90% threshold has had tangible economic consequences.

When the Herndon, Ash, and Pollin paper was posted on the internet about 5 weeks ago on April 15, the S&P 500 closed at 1552.36. The S&P 500 began 2013 at 1426.19, surpassing1500 on January 25. From January 25 until April 15, the S&P 500 fluctuated in the 1500 to 1550 range, only occasionally rising above or falling below those limits. On April 16 and 17, the S&P 500 rose and then fell by about 20 points, closing at 1552.01 on Wednesday April 17. On Thursday April 18, Krugman wrote his New York Times column “The Excel Depression,” the S&P 500 fell to an intraday low of 1536.03 before closing at 1541.61. The S&P 500 has subsequently risen 17 of the next 21 trading days, closing at 1667.47 on last Friday, an increase of almost 126 points, or more than 8%.

I suggest that the most important economic news since April 15 may have been the collapse of the austerity caucus following the public exposure of the Reinhart-Rogoff 90% threshold as a fraud, so that the markets are no longer worried (or, at least, are less worried than before) about the risks that further fiscal tightening will offset the Fed’s modest steps in the direction of monetary ease.

Another positive development has been the decline in the CPI in both March and April, reflecting fortuitous supply-side expansions associated with declining energy and commodity prices. With falling inflation expectations caused by positive supply-side (as opposed to negative demand-side) forces, real interest rates have risen sharply, the 10-year TIPS yield rising from -.69% on April 15 to -.31% on May 17. That increase in real interest rates presumably corresponds to an increase in expected future real incomes. So the economic outlook has gotten a little less bleak over the past month. Call it a reverse Reinhart-Rogoff effect.


8 Responses to “The Reinhart-Rogoff Rally”

  1. 1 Benjamin Cole May 20, 2013 at 1:36 am

    Well as a Market Monetarist, I think the Krugman-Reinhart-Rogoff debacle-debate is off the mark anyway.

    Monetary policy is more potent than fiscal, and a better choice anyway. A federal budget should be there to accomplish worthy tasks. I see little advantage in accumulating more debt, but I doubt there is magic line somewhere. Anyway, what do the R&R boys say about postwar America? We boomed! And had a lot of debt.

    Why did we boom? Martin at the Fed typically accommodated Presidential concerns about growth, in that Cold War era. You didn’t want to crimp the economy when the Reds were touting their’s as a better way of life…and threatening hostilities. Fighting inflation, in that backdrop, seemed like something for the bean-counters to worry about.

    Today, bring on the printing presses, I say, and send back to the bean-counters the job of fretting bout inflation. Monetize debt, QE hard and heavy, expanding amounts until clearly stated goals are obtained.

    Exhume Martin and make him Fed chief again.

    Inflation is dead, would that we could get it up to low single digits. Even that will be a challenge.

    But there is some good news.

    We now have the BoJ and the Fed doing QE, and the People’s Bank of China well below their ceiling of 3.5 percent inflation, and so talking stimulus too.Other central banks–Thailand, Indonesia, S Korea are talking growth. BoE may go to NGDP targeting.

    If only, only, the ECB could come around….

    Well, Europe will be a nice museum and tourist center for decades to come, and probably cheap too.


  2. 2 B. Park May 20, 2013 at 2:30 am

    Hmm, the word fraud jumped out at me. Right before the R&R debacle I had read about famous cases of academic fraud. Famous because the frauds had become notables within their academic fields. Contrary to the stereotype about introverted scientists some of them were convincing manipulators, whose character others would vouch for. Indeed, a fair number of economists prefaced their criticisms with variations of “I don’t doubt R&R’s integrity”. So I suspect the thought of fraud (or political motivation) crossed more than one mind, but they were either reluctant to call them out, or simply dismissed it as impossible. I can’t really tell if fraud is involved here, and even if there is it’s probably just one who is guilty, not both.

    But this whole thing did make me ponder a larger issue. How does one expose fraud in the dismal science? Not the easily proved things like plagiarism but skewing of results and so on. There’s a fair amount of disagreement, and such radically different conclusions that I wonder how can you spot a fraud? I tried looking around and did find this application of Benford’s law to economic fraud:

    But are there more? Methods that can’t be easily dismissed as a matter of opinion?


  3. 3 Luis May 20, 2013 at 12:27 pm

    “If only, only, the ECB could come around….

    Well, Europe will be a nice museum and tourist center for decades to come, and probably cheap too.”
    That in the best scenario


  4. 4 B. Park May 21, 2013 at 2:58 am

    In all fairness to R&R, Jeff Frankel just wrote on his blog that they had returned to the subject of growth and debt in 2012, and the second time around they couldn’t see evidence of a sudden dropoff (though the abstract reads as if there was no contradiction with their earlier paper). So perhaps the original errors were the result of extraordinary sloppiness after all.


  5. 5 Wonks Anonymous May 21, 2013 at 8:30 am

    I really doubt policymakers are that influenced by R&R.
    The stock market probably pays a lot more attention to Shinzo Abe.


  6. 6 David Glasner May 22, 2013 at 9:55 am

    Benjamin, The problem with Reinhart and Rogoff is that it at least has the appearance of a kind of pandering to the austerity caucus. The argument was sloppy, and without actually making the argument themselves, they seemed to invite the austerity caucus to read their results in a way that they were unwilling to articulate explicitly. I agree that the overall policy environment is improving and the stock market is taking notice, as Wonks Anonymous observes below. Attributing it to Reinhart and Rogoff was just my way of having a little fun at their expense.

    B. Park, I agree that there was something disreputable about their performance, but I see no basis for a fraud accusation. In my experience at the FTC, I have seen economic analyses conducted by economic experts that I would definitely suspect had been deliberately rigged to produce a predetermined result desired by the client. But suspicion is one thing, proof is another.

    Luis, I hope you’re wrong.

    B. Park, Thanks for your update.

    Wonks Anonymous, As I wrote to Benjamin above, my attributing the stock market rally to the exposure of R&R was done partly in jest. But I wouldn’t say that they were entirely without influence on policy markers. Providing the appearance of intellectual justification for a desired policy is not an unimportant contribution.


  7. 7 Mike Sax May 22, 2013 at 8:40 pm

    Interesting idea of yours that the low inflation is due to supply side factors. I haven’t run across that idea elsewhere. I had read it as another reason why we should do whatever we can-monetary or fiscal-to stimulate the economy. After all, inflation is not a worry at 1.1%-Bernane has set himself 2.5% as a ceiling at least now anyway


  1. 1 Thomas Piketty and Joseph Schumpeter (and Gerard Debreu) | Uneasy Money Trackback on May 29, 2014 at 10:14 am

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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