Slanting the Reinhart and Rogoff Error

"You'll be happy to know that stupidity is not hereditary. You acquired it all by yourselves."
--Margaret Garrison (Deadline U.S.A)

During the reporting of the Boston bombing, I heard one pundit state that we should consume media info using 'the 75% rule', meaning that media consumers should assume that only 75% of what is presented about a breaking story is actually true.

For many stories, it seems like 75% is far too generous.

Take, for example, reports surrounding the error in the Reinhart and Rogoff (RR) research about the relationship between sovereign debt and economic growth. A central finding of RR's work, work that we have considered a number of times on these pages, is that higher debt is associated with longer term economic growth. At some point, the debt becomes insurmountable and generally leads to default either directly or via inflation.

That these findings should be considered surprising suggests how far off the rails from basic economic understanding that we have travelled. Nevertheless, it took a multi-century empirical study of debt escalations and economic collapses by high profile researchers to bolster the legitimacy of basic ECON 101 findings in the eyes of some.

Last week three academics from UMass produced a working paper claiming significant errors in the analysis of two RR working papers from 2010. Note the term 'working paper,' meaning that all three of the works--the two RR papers and the UMass critique, should be considered to be works in progress and have not been published in any peer reviewed outlet to date.

That said, it does appear that some of the findings from the two RR working papers have spilled into some work that has been published. See, for example, Reinhart & Rogoff (2011) and Reinhart, Reinhart & Rogoff (2012).

Now, calling out researchers on their findings is a serious matter that cannot be dismissed. RR must answer to those charges and they have indicated that they will.

However, challenges w.r.t. the magnitude of RR's empirical results do not alter the underlying theoretical framework. Higher debt is associated with lower economic growth. As demonstrated here, RR results adjusted for the UMass observations do not alter the negative relationship between debt and growth--something that the UMass researchers, despite the title of their paper, do not seriously contest.

The disagreements between these academics will be resolved over time via the traditional back and forth process. That is the power of formal, written thought process for advancing the truth.

Unfortunately, the media do not follow such a process. As observed in this missive, the media have once again revealed their bias in the way they have treated this story. The sensationalistic headlines speak for themselves. For example:

LA Times: How an Excel error fueled panic over the national debt
Business Week: The Excel error that changed history

Responsible journalists would have a) waited for the full RR rejoinder, and/or b) considered the UMass claims in light of materially altering the implications of the original RR study before writing. Instead, many media outlets have engaged in slanting the UMass study in a manner that can easily be construed as agenda driven.

It is straightforward to conclude that many in the media do not like the idea that government spending and debt constrain growth, and that journalists are jumping at an opportunity to discredit the idea.

This morning I heard a 'financial expert' suggested that the UMass study gives government greater license to spend our way out of problems.

Rather than offering well thought perspective about the merits of such a suggestion, the media's recent efforts appear to endorse it.

References

Reinhart, C.M. & Rogoff, K.S. 2011. From financial crash to debt crisis. American Economic Review, 101: 1676-1706.

Reinhart, C.M., Reinhart, V.R., & Rogoff, K.S. 2012. Public debt overhangs: Advanced economy episodes since 1800. Journal of Economic Perspectives, 26(3): 69-86.