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Thread: Influential Reinhart-Rogoff Study on Austerity May Be Flawed

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    Influential Reinhart-Rogoff Study on Austerity May Be Flawed

    http://www.thefiscaltimes.com/Articl...wed.aspx#page1


    Ok, stop the BS and start fixing the infrastructure.



    By THE STAFF, Reuters

    April 16, 2013

    One of the key intellectual touchstones in the move towards government austerity efforts around the world may have been incorrect in its conclusions due in part to spreadsheet coding errors, researchers said on Tuesday.

    A study by eminent Harvard economists Carmen Reinhart and Kenneth Rogoff first presented in 2008 said a country's gross domestic product growth begins to slow once its debt-to-GDP ratio reaches at least 90 percent. The research has been cited by officials in the United States, the European Union and elsewhere as justification for tackling deficits.

    But researchers at the University of Massachusetts at Amherst, in a new study, say that the average real growth rate for countries with a public debt to GDP ratio of more than 90 percent "is actually 2.2 percent, not minus 0.1 percent as published in Reinhart and Rogoff."

    "Coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period," wrote the authors, Thomas Herndon, Michael Ash and Robert Pollin.


    Reinhart and Rogoff, who said they had only just received the study, defended their original findings.

    "Of course much further research is needed as the data we developed and is being used in these studies is new," they said in a joint response by email. "Nevertheless, the weight of the evidence to date - including this latest comment - seems entirely consistent with our original interpretation of the data."

    Pollin told Reuters that the purpose of their work was not to prove that public debt levels did not matter. Rather it was to counter the idea that there was some sort of general rule - the Reinhart-Rogoff 90 percent threshold - "and once you go over that, you go over the abyss," he said.

    Reinhart and Rogoff's work was influential in the austerity debate in recent years, as some governments that saw growth slow and debt rise responded with spending reductions and higher taxes, which in some cases, such as the United Kingdom, have worsened demand.

    Senator John Cornyn, a fiscally conservative Republican, cited the Reinhart and Rogoff finding as he questioned Treasury Secretary Jack Lew at a hearing last week about the impact of the large U.S. deficit on economic growth.

    And financial leaders of the world's 20 biggest economies said they will consider at a meeting later this week a proposal to cut their public debt over the longer term to well below 90 percent of gross domestic product, according to a document prepared for the meeting obtained by Reuters.

    In February, European Commissioner Olli Rehn expressed his concern with high debt levels in the European Union, referencing "serious academic research" that points to the 90 percent threshold that causes slow growth.

    Former U.S. vice presidential candidate Paul Ryan, Republican congressman from Wisconsin, has cited these statistics in the past. He said in a statement before the House Committee on the Budget in June 2011 that "economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth."

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    In other words spend more money we don't have.

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    I’d say the theory that having low federal debt is more important than having low unemployment is undone. There a tens of thousands of bridges that need to be fixed and folks sitting around collecting unemployment. Why not give those folks jobs instead of handouts?

    Expanding our rail system our internet system and our electrical system will make our economy more productive. Lots of things must be done. Many things should be done. The “logic” for not doing them was flawed. Let’s stop embracing this theory out of knee-jerk party loyalty. Be wise. Move on.

    And BTW we do have plenty of money. It is all pooled at the top. Let’s give those folks at the top reason to spend it. Playing it safe is what will kill us. China is not playing it safe, China is not sitting on trillions in cash… and they are eating our lunch.

    How many outstanding American endeavors were started with loans?

    Does anyone buy a house without a mortgage?

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