Everyone's Missing the Bigger Picture in the Reinhart-Rogoff Debate

George Washington's picture

You've heard that an incredibly influential economic paper by Reinhart and Rogoff (RR) - widely used to justify austerity - has been "busted" for "excel spreadsheet errors" and other flaws.


As Google Trends shows, there is a raging debate over the errors in RR's report:

Even Colbert is making fun of them.

Liberal economists argue that the "debunking" of RR proves that debt doesn't matter, and that conservative economists who say it does are liars and scoundrels.

Conservative economists argue that the Habsburg, British and French empires crumbled under the weight of high debt, and that many other economists - including Niall Ferguson, the IMF and others - agree that high debt destroys economies.

RR attempted to defend their work yesterday:

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”


This view generally reflects the state of the art in economic research




Back in 2010, we were still sorting inconsistencies in Spanish G.D.P. data from the 1960s from three different sources. Our primary source for real G.D.P. growth was the work of the economic historian Angus Madison. But we also checked his data and, where inconsistencies appeared, refrained from using it. Other sources, including the I.M.F. and Spain’s monumental and scholarly historical statistics, had very different numbers. In our 2010 paper, we omitted Spain for the 1960s entirely. Had we included these observations, it would have strengthened our results, since Spain had very low public debt in the 1960s (under 30 percent of G.D.P.), and yet enjoyed very fast average G.D.P. growth (over 6 percent) over that period.




We have never advised Mr. Ryan, nor have we worked for President Obama, whose Council of Economic Advisers drew heavily on our work in a chapter of the 2012 Economic Report of the President, recreating and extending the results.

In the campaign, we received great heat from the right for allowing our work to be used by others as a rationalization for the country’s slow recovery from the financial crisis. Now we are being attacked by the left — primarily by those who have a view that the risks of higher public debt should not be part of the policy conversation.

But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring.

Initially, RR never pushed an austerity-only prescription.  As they wrote yesterday:

The only way to break this feedback loop is to have dramatic write-downs of debt.




Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.”


Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work.

Indeed, the nation's top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.

Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression.  Unless we shrink the financial sector, we will continue to have economic instability.

Leading economists also say that failing to prosecute the fraud of the big banks is dooming our economy.  Prosecution of Wall Street fraud is at a historic low, and so the wheels are coming off the economy.

Moreover, quantitative analyses provides evidence that private debt levels matter much more than public debt levels.  But mainstream economists on both the right and the left wholly ignore private debt in their models.

Finally, the austerity-verus-stimulus debate cannot be taken in a vacuum, given that the Wall Street giants have gotten the stimulus and the little guy has borne the brunt of austerity.

Steve Keen showed that giving money directly to the people would stimulate much better than giving it to the big banks.

But the government isn't really helping people ... and has  instead chosen to give the big banks hundreds of billions a year in hand-outs.

(Obama's policies are even worse than Bush's in terms of redistributing wealth to the very richest. Indeed, government policy is ensuring high unemployment levels, and Obama – despite his words – actually doesn’t mind high unemployment. Virtually all of the government largesse has  gone to Wall Street instead of Main Street or the average American. And “jobless recovery” is just another phrase for a redistribution of wealth from the little guy to the big boys.)

If we stopped throwing money at corporate welfare queens, military and security boondoggles and pork, harmful quantitative easingunnecessary nuclear subsidies,  the failed war on drugs, and other wasted and counter-productive expenses, we wouldn't need to impose austerity on the people.


Neither stimulus nor austerity can ever work … unless and until the basic problems with the economy are fixed.


But stimulus and austerity are not only insufficient on their own … they are actually 2 sides of the same coin.


Specifically, the central banks’ central bank warned in 2008 that bailouts of the big banks would create sovereign debt crises. That is exactly what has happened.


Remember, it is not the people or Main Street who are getting bailed out … it is the giant banks.


A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent often leads to austerity:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.


Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.



All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

In other words, the “stimulus” to the banks blows up the budget, “squeezing” public services through austerity.


But instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy.


And instead of imposing draconian austerity, we could stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this). This would be better for the economy as well.


Why aren’t we doing this?


Because – underneath the false easing-versus-tightening debate – this is not a financial crisis … it’s a bank robbery.


Profits are being privatized and losses are being socialized.  So the big banks get to keep the mana from heaven being poured out of the stimulus firehose, while austerity is forced on the public who has to bear the brunt of Wall Street’s bad bets.


The big banks went bust, and so did the debtors.  But the government chose to save the big banks instead of the little guy, thus allowing the banks to continue to try to wring every penny of debt out of debtors.  An analogy might be a huge boxer and a smaller boxer who butt heads and are both rendered unconscious … just lying on the mat.   But the referee gives smelling salts to the big guy and doesn’t help the little guy, so the big guy wakes up and pummels the little guy to a pulp.


And creditor committees dominated by giant banks like Goldman which helped countries like Greece fraudulently cover-up their financial problems are now demanding austerity, and Greece is holding a fire sale of its infrastructure, public utilities, tax base and whole islands to give to the creditors.  Spain, Italy, and even countries like the U.S. are no different.


As we wrote last year:

Economists note:

A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.

Indeed, all of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.


A “jobless recovery” is basically a redistribution of wealth from the little guy to the big boys.




Economist Steve Keen says:

“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.

Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.


And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.


The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …

… and ending up in the pockets of the [fatcats].

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Punch Bag's picture

Sorry, I thought you said fart club.

Uncle Remus's picture

Well, there is the hot air...

LetThemEatRand's picture

I didn't throw you anywhere.  What argument are you having with me?  Your post merely stated that what I said isn't what I meant.  You don't mean what you say.  Now prove you do.

Harbanger's picture

This thread is getting too narrow to argue.  I'll knock your ass out somewhere else.

Harbanger's picture


Choose the thread, let me know where, and I'll teach you something.

LetThemEatRand's picture

Promises, promises.  I'll try to find one narrow enough for you.

Harbanger's picture

What's wrong with you? When my 2 yr old daughter asks me "you wanna talk?"... Well that brings a Big smile to my face, of course darling, what would you like to talk about?

FreeMktFisherMN's picture

My argument was never contingent on there being historical precedent. I am a Christian and know that there is no 'utopia' on this earth. Man is corrupted by sin. That is where I differ with Ayn Rand. I just advocate free markets, as besides obviously leading to prosperity, the value of liberty itself is incalculable. With capitalism one is serving one's fellow man at a price the market bears, as opposed to price fixers and rent seekers like govt brings about.


Obviously it was no accident that when the market was opened in Britain productivity and living standards took off like never before seen, and here in the U.S. for a time it was explosive in industrial revolutions and perpetually falling prices and gains in real purchasing power. Demonstrated that falling prices is a good thing as people reap the benefits of productivity increases. 


LetThemEatRand's picture

Britain's success coincided with North Sea Oil and free debt creation (with the public taxpayer being on the hook for said debt).  And if you feel the need to invoke Christianity to justify your view of markets, you may want to go back and re-read.  He was not a free market capitalist, I think.

Colonial Intent's picture

15% of our gdp was the north sea oil, now its running out we have 15% less gdp.

FreeMktFisherMN's picture

Actually the Bible emphasizes honest weights and measures. When it came to my realizing I am a libertarian, it was about recognizing that while I have strong moral convictions, it's not the Christian way to use force to impose those values on others. The Catholics on the other hand indeed used the sword to convert people, and obviously had tons of corruption that still exists today, as well as its perverted doctrine. 

I believe in charity and giving to those less fortunate. I do not believe in stealing money from  another person to give to another. 


And obviously Britain was still mercantilist for awhile, but they really did have people like Richard Cobden who emphasized free trade and were against colonialism. It was no coincidence that they took off, and then they indeed squandered it as the Zionists infiltrated and people became more prone to take on debt and became less industrious.

JOYFUL's picture

LRER&FMFMN....if you(se)will allow me to break into your cage match...

and pronounce you both winners....but disqualified from further competitive outings -until you realize that you are a TAGTEAM...as in, on the same side...fighting against the usual suspects(aka Ernie Roth managed Abdullah\jamie dEmon-'I LIKE TO HURT PEEPLE!' Farouk &-Abdullah\lloyd 'Frankenstein' blankfein da Butcher)!

Please synthesize your dialogue into a synopsis of 'anti-Hegelian dialectical materialistic sionist hegemonist duplicity' now...

and you(se) can both be wearin the golden belt(s) soon!

i-dog's picture

LOL ... you da man, Joyous One! (Have you now traded your ElKabong cape for Luchador tights?)

JOYFUL's picture

El Luch is a bit of a luch -si m'entiendes - and therefore I prefer to gird my gonads in the traditional fightin garb of the Tocharian warrior of C6/7th knights - as found on the muralled walls of the caves of Kizil -  brought back to Berlin via camel\packhorse by the German expeditions of the early C20th...and then blown to smithereens in the frenzy of Bomber Harris n da boyz...to erase all signs of our previous civility n cultural magnifique!

But I thank you for the commendation of my humble efforts to evoke the memory of better days...when the cast n crew of the wrestlin hordes could sell out the Gardens n Cobb Centre for a weekend ticket of the wackiest bunch of bad guys what could ever grace a mat!

Should yu find it expedient at anytime to wish to spar with a couple o the usual suspects here in tag teamin fashion...jus give me a buzz...I've always wanted to don the togs for a bit of Whipper Billy Watson impersonation!

i-dog's picture

El Luch knows what's goin' down, and has left plenty of nuggets buried in his tortuous tailings to konfirm his kredentials, so I'm assuming he's an acolyte who has been directed here to "warn" (or recruit) those with a mind to hear.

(I drafted a much longer and more detailed reply, but I see we're up against the screen edge...so I'll save it for later).

Put 'em in a headlock, Billy!!!

JOYFUL's picture

Prefer the 'corkscrew wristlock', which the great one applied with such devastatin effect to Lou Thesz...in the bout where he 'wrestled' the title from him...

As to your buddy Luch...his first appearance up he tried a very louche macho move pon yours truly...positioning hisself in my mind as a Gorgeous George\Gene Kiniski\the Sheik type of performer....has yet to tug his forelock in pology to me for the faux bravado...so...

he's all yours - Mabee youse can makes a man of him!

Speakin of which...read this encomium to the Whipper -

the living embodiment of all the ideals of the Boy Scout movement and the Legion of Decency. Watson is as handsome as Robert Taylor, as powerful as the SS Queen Mary and as persistent and uncompromising as Dick Tracy in his efforts to exterminate evil. In moments of supreme exasperation he is likely to mutter "Oh, fudge!" but otherwise conduct is exemplary. He is a paragon of virtue in the ring. If his opponent attempts to decapitate him with a tomahawk, misses and imbeds the tomahawk in one of the ring posts, Watson will help him to disengage the weapon. If his opponent strikes him illegally with a brass knuckle, Watson merely will smile a sad, brave smile and break his opponent in twain, like a stick of dry macaroni. Watson destroys his opponents with the air of Sir Galahad repelling scorpions, and the customers love him to pieces."

Damn...doesn't get better than that!...if only our kids had heroes like him to look up to today!

i-dog's picture

Yeah ... after looking back through his agenda here and elsewhere yesterday, I felt like an idiot for applauding his accuracy the first time I saw him post here a week or so ago.

His hubris will trip him up, as will his belief that illusory magic numbers will trump real human ingenuity. Those magic numbers certainly didn't help the KKK over the past 2,500 years ... versus their cunning over the past 250 years.

The sole purpose / use of Kabbalah is to convince believers that they are "special" and "invincible".

Ptttoooey ... I fart in their general direction....

[Footnote: He joined ZH on 28th Feb and first blogged on his own website 5 days later]

JOYFUL's picture

good sniffin...

wit so many bones-(men)littering the lawn, it's hard for even a top dawg to keep up with the kleptos klever komputations here...

yup...I gotsa call em as I 'psychically view' em Dawg...

let anutter utter shlll bite de dust!

nmewn's picture

"Some of us believe there is a middle ground where government leaves us alone for the most part, but where it is okay to coerce the more selfish among us to contribute to roads, bridges, fire departments, police, courts, airports, etc."

You propose "tax fainess & equal contribution" by using words like selfish & some sort of government/public coercion...breath taking...lol. 

The only "middle ground" is to get rid of the progressive tax code where a 2,000 page law can become 20,000 pages of regulations to include political favortism for the cronies of the moment.

LetThemEatRand's picture

Yes, it is undeniable and demonstrably true what you say.  

steve from virginia's picture




"Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression.  Unless we shrink the financial sector, we will continue to have economic instability."


Even if we shrink the financial sector will have economic instability. The economy is dying for reasons in addition to finance excess (it was never alive to begin with).


Rogoff-Reinhart's failure has been to correlate debt levels to GDP growth when GDP itself is a measure of debt. No matter how the debt baseline is calculated and where it is placed, expansion of the debt will eventually exceed it.


If it doesn't exceed the baseline it is because there is no growth, not because there is less finance. Even Keen is wrong about this one ...



centerline's picture

I really like Keen's work, but I too think he is skirting the bigger issues that get outside the mathematics.  Prior speeches and papers indicate to me he is not ignorant of the bigger issues.  But, I suppose in order to avoid being labeled as completely fringe, he has to more carefully nudge the boundaries of modern economic thinking.