Carmen Reinhart and Kenneth Rogoff, the two economists who inspired the now-discredited claim that economic growth drops off sharply when a country's debt exceeds 90 per cent of GDP, have written an open letter to Paul Krugman, the Nobel laureate and New York Times econoblogger, in which they condemn his "spectacularly uncivil behavior" over the weeks since their key work was exposed as flawed.
You have attacked us in very personal terms, virtually non-stop, in your New York Times column and blog posts. Now you have doubled down in the New York Review of Books, adding the accusation we didn't share our data. Your characterization of our work and of our policy impact is selective and shallow. It is deeply misleading about where we stand on the issues. And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply.
The letter goes on to reinterate the kernel of the disagreement between Reinhart and Rogoff and the left-Keynesian blogosphere, of which Krugman is an unofficial leader: how responsible are the pair for the claim which they came to be seen as the source of, how defensible that claim is, and how much damage has been done by policymakers latching on to it to justify austerity movements the world over.
They write, for instance, that:
The debate of the last few weeks does not change the fact that debt levels above 90% (even if one entirely rejects this marker for gross central government debt as a common cross-country "threshold") are very rare altogether and even rarer in peacetime. From 1955 until right before the recent crisis, advanced economies spent less than 10% of those years at a debt/GDP ratio of higher than 90%; only about two percent of the years are above 120% debt/GDP. If governments thought high debt was a riskless proposition, why did they avoid it so consistently?
Krugman, for his part, has responded with a piece focusing on "where their analytical sin lies", writing that:
To some extent it lies in the downplaying of causality issues — of whether high debt causes slow growth, slow growth causes high debt, or both high debt and slow growth are the result of third factors (as was the case in demobilizing postwar America, which they highlighted in their original paper).
But the more important sin involves the misuse of the “90 percent” criterion…
[There is] an enormous difference between the statement “countries with debt over 90 percent of GDP tend to have slower growth than countries with debt below 90 percent of GDP” and the statement “growth drops off sharply when debt exceeds 90 percent of GDP”. The former statement is true; the latter isn’t. Yet R&R have repeatedly blurred that distinction, and have continued to do so in recent writings.
Indeed, the 90 per cent threshold is just an artefact of the arbitrary groupings the original paper used to analyse the data. Reinhart and Rogoff analysed the effects of debt below 30 per cent of GDP; between 30 and 60 and 60 and 90 per cent; and above 90 per cent. Owing to several questionable methodological choices and one outright error, the 90 per cent bucket showed a large dropoff in growth; but the fact that 90 per cent was the level of the discontinuity happened no reason other than the chance decision by the economists to split the categories at that level.
And as Krugman points out, that distinction is crucial when countries like the UK are hovering at exactly that level. It is a hard position for Reinhart and Rogoff to be put in; they didn't explicitly make the claim in any paper they wrote, and since the flaws were pointed out, they have actively been rolling it back. Nonetheless, their work on the matter did not win fame for pointing out the simple correlation between high debt to GDP ratios and slow growth, but for (at the very least) strongly implying a causation. Politicians began to claim, with reference to their paper, that debt to GDP ratios over a certain level caused low growth. Take George Osborne in 2012:
Our gross debt is already forecast to peak above 90% of GDP, a level above which the evidence suggests higher debt tends to reduce growth.
Coincidentally, Osborne was pressed today on his support for this paper by Evan Davis on Radio 4's Today programme, and refused retract it, saying "I don't think most people doubt that countries carrying very high debt burdens suffer economically for that." Almost as though he was taking notes, he also echoed Reinhart and Rogoff's point that they've been very good at spreading understanding of financial crises, which is true but also faintly irrelevant.
In the end, though, the battle lines have been drawn, and no-one is likely to change their mind after this open letter. Which is why much of the debate in economics circles isn't over the economics of the thing at all, but over the demand that Krugman present his objections civilly. And to that, he writes:
Since we’re probably going to have a bunch of stories about feuding economists and all that, just a reminder: it’s not about the people. It’s about the disastrous wrong turn policy took, all across the advanced world, in 2010. The economists matter only to the extent that they aided and abetted that wrong turn; their feelings (and mine!) matter not at all.